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T 









BUSINESS-A PROFESSION 


■C% 


BY 


LOUIS D. BRANDEIS 


WITH A FOREWORD BY 
ERNEST POOLE 



BOSTON 

SMALL, MAYNARD & COMPANY 

PUBLISHERS 

* c 






Copyright, 1914 
By Small, Maynard & Company 

(incorporated) 

Copyright, 1925 
By Small, Maynard & Company 

(incorporated) 


THE UNIVERSITY PRESS, CAMBRIDGE, U.S.A. 


MAR -2 *25 

©CU 823232 
'WO I 


PUBLISHERS’ NOTE 


In response to a demand that there be brought 
together in one volume the chief public utterances 
of Mr. Louis D. Brandeis, and because they feel 
that this demand is the natural outgrowth of Mr. 
Brandeis’s vital interest in matters of large public 
importance, his success in pointing out the logical 
outcome of greatly confused conditions, his ability 
and wisdom in making a sound diagnosis and formu¬ 
lating a hopeful treatment of problems of peculiar 
difficulty, and his unselfishness and untiring devotion 
at all times to the common good, the publishers 
present the papers here compiled, in the belief that 
they will be of unique interest and of permanent 
value. 

Of the papers here gathered, Mr. Poole’s foreword 
appeared in shorter form in The American Magazine; 
“Business—A Profession,” in System; “Organized 
Labor and Efficiency,” in The Survey; “The Road 
to Social Efficiency,” in The Outlook; “Our New 
Peonage: Discretionary Pensions,” in The Independ¬ 
ent; “The Incorporation of Trades Unions,” in The 
Green Bag; “How Boston Solved the Gas Problem,” 
in The American Review of Reviews; “Savings Bank 
Insurance,” “Trusts and Efficiency,” and “Trusts 
and the Export Trade,” in Collier's; “Competition 


vi 


PUBLISHERS’ NOTE 


that Kills,” in Harper's Weekly; “The New Haven 
•— An Unregulated Monopoly,” in the Boston Journal; 
“An Aid to Railroad Efficiency,” in The Engineering 
Magazine; and “The Opportunity in the Law,” in 
The American Law Review; “The Living Law,” in the 
Illinois Law Review; “Efficiency by Consent,” in In¬ 
dustrial Management; “Interlocking Directors,” in The 
Annals of the American Academy of Political and Social 
Science. Grateful acknowledgment is made to the 
editors of these publications for their kind permission 
to reprint 


CONTENTS 


Page 

“Brandeis.” By Ernest Poole . ix 

Supplementary Notes. By Felix Frankfurter lvii 


Business — A Profession . i 

The Employer and Trades Unions. 13 

Hours of Labor. 28 

Organized Labor and Efficiency. 37 

Efficiency by Consent . 51 

The Road to Social Efficiency. 57 

Our New Peonage: Discretionary Pensions . 71 

The Incorporation of Trades Unions .... 88 

How Boston Solved the Gas Problem .... 99 

Life Insurance: The Abuses and the Remedies 115 

Savings Bank Insurance.160 

Successes of Savings Bank Life Insurance . 188 

Trusts and Efficiency.205 

Trusts and the Export Trade.225 

Competition that Kills.243 

The New England Transportation Monopoly 262 
The New Haven — An Unregulated Monopoly 286 

An Aid to Railroad Efficiency.313 

Interlocking Directors.320 

The Opportunity in the Law ..329 

The Living Law.344 

True Americanism.364 




















BRANDEIS 1 


A REMARKABLE RECORD OF UNSELFISH WORK DONE 
IN THE PUBLIC INTEREST 

By Ernest Poole 

During the Ballinger investigation, in which 
he was the driving force, he frequently began 
his day at four o'clock in the morning. His 
pitiless examinations of witnesses and the start¬ 
ling disclosures he made are widely known. But 
the man himself is little known, for the man is 
self-effacing. 

Heis fifty-sevenyearsold,over medium height, 
his rugged figure slightly stooped. His face, 
with its high forehead, prominent cheek bones, 
deep-set eyes and heavy lines about the broad 
and sensitive mouth, gives an impression of 
immense force, of a mind keen, subtle, trained, 
a mind of large vision, big ideals. And yet it is 
a likable face; his manner is kindly and he has 
many devoted friends. His private practice is 
one of the largest in New England, but more 
than half his time is spent in public legal work. 

1 Published in the “ American Magazine ” in February, 1911, and 
now revised. 


X 


BRANDEIS 


And for this work he takes no fees. In an 
address some years ago he said: 

“It is true that at the present time the lawyer does 
not hold that position with the people which he held 
fifty years ago; but the reason is in my opinion not 
lack of opportunity. It is because, instead of holding 
a position of independence between the wealthy and 
the people, prepared to curb the excesses of either, the 
able lawyers have to a great extent allowed them¬ 
selves to become an adjunct of the great corporations, 
and have neglected their obligation to use their powers 
for the protection of the people. If we are to solve 
the important economic, social and industrial ques¬ 
tions which have become political questions also, it 
seems to me clear that the attitude of the lawyer in 
this respect must be materially changed. . . . The 
great opportunity of the American Bar is and will be 
to stand again as it did in the past, ready to protect 
also the interests of the people.” 

Of this work in the peopled service, his story 
is a unique example: 

THE ORIGIN OF BRANDEIS 

He was born in 1856, in Louisville, Ky. He is 
a Jew. For a century back his family was made 
up of men of means, education, social ideals. 
His maternal grandfather took an active part in 
Poland’s struggle of 1830. His father sympa¬ 
thized deeply with the Bohemian movement of 


BRANDEIS 


XI 


1848. And in Kentucky, before the war, his 
father and his uncle were both intense aboli¬ 
tionists. “My earliest memories,” he told me, 
“were of the war. One exceedingly painful 
memory is of a licking I got in school on the 
morning after Bull Run. I remember helping 
my mother carry out food and coffee to the men 
from the North. The streets seemed full of 
them always. But there were times when the 
rebels came so near that we could hear the firing. 
At one such time my father moved us over the 
river. Those were my first memories. ,, 

Later the family went abroad, and he was 
placed in a Dresden school. His father sug¬ 
gested that he remain in Europe and take up an 
academic career. But the son refused. “I was 
a terrible little individualist in those days,” he 
said, “and the German paternalism got on my 
nerves. One night, for instance, coming home 
late and finding I had forgotten my key, I 
whistled up to awaken my roommate; and for 
this I was reprimanded by the police. This 
made me homesick. In Kentucky you could 
whistle. ... I wanted to go back to America, 
and I wanted to study law. My uncle, the abo¬ 
litionist, was a lawyer; and to me nothing else 
seemed really worth while.” 

When the panic of 1873 brought to his father 


BRANDEIS 


xii 

heavy losses in business, he still held to his 
course. He entered the Harvard Law School, 
working his way; he did his eyes an injury 
from which they have never fully recovered; 
and at the end of two years the authorities sus¬ 
pended the rules to let him take his degree at 
twenty. “ Those years,” he said, “were among 
the happiest of my life. I worked! For me the 
world’s center was Cambridge.” This enthusi¬ 
asm he retained, becoming the organizer, in 
1886, of the Harvard Law School Association. 

At twenty-two he began practice in Boston. 
Before he was thirty his practice was large, and 
since then it has steadily grown. “I had my 
share of big corporation work,” he told me. 
“I even worked for a trust or two. Perhaps 
that is one reason why I’m not a corporation 
lawyer now.” 

He had many friends in the literary and mu¬ 
sical circles of Boston. But his deeper interest 
was in social economic problems. “ As a whole,” 
he said, “I have not got as much from books as 
I have from tackling concrete problems. I have 
generally run up against a problem, have pain¬ 
fully tried to think it out, with a measure of 
success, and have then read a book and found 
to my surprise that some other chap was be¬ 
fore me. 


BRANDEIS 


xm 


“I first went through the stage of charitable 
work.” He served on his district committee, 
visiting in person the applicants for relief. In 
the late eighties he acted as counsel in a move¬ 
ment to reform certain state relief institutions, 
and early in the nineties he took the lead in a 
long and thorough investigation into the public 
charitable institutions of Boston. 

When he married in 1891, he had already 
made up his mind to give more and more time 
to public work, and with this purpose his wife 
was in thorough accord. Though his income 
was large, they agreed from the start upon a 
most simple scale of living, so leaving time and 
money free for the series of public struggles in 
which he has engaged ever since. 

In one of his early efforts there is a certain 
grim humor. In 1897 he went to Washington 
to appear for the consumer in the Dingley Tariff 
hearing. I quote from a paper of that date: 
“Mr. Louis D. Brandeis, the brilliant young 
Bostonian who appeared before the Ways and 
Means Committee to-day on behalf of the con¬ 
sumers of the United States, did not receive a 
very cordial welcome. . . . ‘I desire/ he said, 
'to speak in behalf of those who form a far 
larger part of the people of this country than 
any who have found representation here.’ * • . 


xiv 


BRANDEIS 


At this point there were signs of restlessness. 
Chairman Dingley felt called upon to tell the 
gentleman that this was not an appropriate 
time for a speech on free trade. A Democratic 
member said he supposed it would be in order 
for one man to appear for the consumer. Mr. 
Brandeis continued, and was again interrupted 
by laughter and jeers. But Mr. Dalzell re¬ 
marked, ‘Oh, let him run down. ,,, And so this 
lone representative of the consumer was allowed 
five minutes more. 

HIS FIRST BIG FIGHT FOR THE PUBLIC 

But his first important public struggle was 
over the traction system in Boston. On the one 
side were big financial interests, the political 
machine and the press; on the other, a handful 
of citizens creating public opinion. Brandeis 
was their counsel, and admittedly the brains of 
the fight. 

For years he had felt that franchises were 
public property which should not be given away. 
He had seen the situation grow worse. In the 
heart of the city the streets available for trolley 
lines were few, narrow and crooked, and became 
frightfully jammed. To relieve the congestion, 
in 1896 the Tremont Street subway was built by 
the city. This subway the West End Company, 


BRANDEIS 


xv 


controlling most of the surface lines, undertook 
to lease, and it was over this lease that the first 
struggle came. A small group of citizens forced 
a hearing. Brandeis appeared as their counsel. 
The fight was carried on into the Legislature, 
and finally the lease was granted — not for fifty 
years, but for twenty years, with a rental to the 
city of 4J/3 per cent of the cost of construction. 
A victory for the people. 

“When I asked Mr. Brandeis for his bill,” 
the man at the head of this movement told me, 
“I expected to pay a fee of five thousand dollars 
at least. ‘There is no fee/ he said. ‘This is 
part of a plan of mine. , And he added that as 
soon as he could do so he intended giving the 
larger part of his time freely to public work.” 

The work came soon. In 1897 certain New 
York financiers acquired the Boston Elevated 
Railway Company. Having bought an old and 
impracticable elevated charter, they secured 
amendments granting them almost perpetual 
rights. They also secured authority to lease 
the West End Company’s surface lines, and 
they asked for a lease of ninety-nine years. Had 
this been granted, they would have been in 
complete control of the transportation system. 
But with a group of vigilant citizens, Brandeis 
renewed the contest. The lease was reduced 


XVI 


BRANDEIS 


to twenty-five years, and in other ways the new 
company’s powers were cut down. The com¬ 
pany, moreover, had one vulnerable point. 
The Tremont Street subway, the only connect¬ 
ing link between the two parts of the elevated 
system, was still under strong municipal control. 

Accordingly, when to meet the increasing 
traffic another subway was asked for in 1900, the 
company tried to secure the right to build it and 
own it practically in perpetuity, and also to 
secure an extension on their Tremont Street 
subway lease for another twenty years. Over 
this key to the situation came the main struggle. 
And here again on the side of the people Bran- 
deis took the lead. When the Public Franchise 
League was formed, he became its counsel. He 
was active in winning over the Associated 
Board of Trade, and in its name a bill which he 
drafted was introduced providing for the con¬ 
struction of the new subway by the city, with 
a lease on the same terms as the old one. In 
support of this bill he appeared at all hearings. 
He went in person repeatedly to the editors of 
the hostile press. “It was here,” he told me, 
“that we had our first lessons in making public 
opinion.” Slowly the public sentiment grew. 
And finally, after a bitter three years’ contest, 
an act almost identical with his original bill was 


BRANDEIS 


xvii 


passed, providing for the construction of one 
or more subways by the city, to be leased for a 
term not exceeding twenty-five years, at a rental 
of 4^ per cent of the cost. 

In 1911 the contest over the subway leases 
broke out anew. With a “strap-hanging” pub¬ 
lic clamoring for new subways, the Elevated 
Company announced that it could assume no 
further burdens without assured possession of 
both the new and the old subways and tunnels 
for about fifty years. The Railroad and Transit 
Commissions indorsed this position, and many 
timid citizens, eager for relief from congestion, 
were ready to yield. The Public Franchise 
League, however, with Brandeis once more lead¬ 
ing the fight, opposed this attempt to fasten the 
company’s grip upon the city, and argued that 
the best guarantee such a company can have is 
the good will of the public induced by its own 
good behavior. This view was speedily cham¬ 
pioned by the press, and an act, drawn under 
the guidance of Mr. Brandeis, with the ap¬ 
proval of Governor Foss, was finally passed by 
the Legislature and accepted by the company, 
which provided for the new subways and for 
leases subject to termination by either the 
city or the company at the end of twenty-five 
years. 


xviii BRANDEIS 

“ Boston has thus established,” he writes, 
“the policy of retaining control of its transpor¬ 
tation system. The city will own all the sub¬ 
ways, and through this ownership and the right 
to revoke surface locations, will control the en¬ 
tire traction system, with power to compel cor¬ 
porations to pay what may seem from time to 
time adequate compensation for the use of the 
streets.” 

A STRUGGLE FOR CHEAPER GAS 

The next struggle, to secure cheaper gas for 
Boston, was won in its crisis, not by fighting the 
company, but by working with it. And for this 
change of policy Brandeis was responsible. 

For twenty years the city’s gas companies 
had been involved in endless scandals. The 
service was poor and the price was high, one 
dollar a thousand feet. But all Massachusetts 
gas companies are subject to strict state con¬ 
trol; and, when in 1903 the Boston companies 
applied for leave to consolidate, the Public 
Franchise League saw its opportunity. A 
long and strenuous contest took place over the 
issue of capital, the Franchise League contend¬ 
ing that, if the company were allowed the high 
capitalization it asked for, lower prices of gas 
in future would be made impossible. When 


BRANDEIS 


xix 

things had come to a crisis, Brandeis proposed 
his plan of co-operation. It startled many in 
the League; some even withdrew, accusing him 
of being in secret alliance with the trust. But 
he held to his course, and after earnest discus¬ 
sion the plan was finally carried out. Its main 
provisions were these: 

The company’s capital was fixed practically 
at the limit set by the League at the start. 
Ninety cents per thousand feet was made the 
“standard price” of gas. And a “standard 
dividend” was fixed at seven per cent. This 
meant a return of less than 4^ per cent on the 
physical value of the property and on its cost 
to the present owners. But the act further pro¬ 
vided that for every five-cent reduction in the price 
of gas , the dividend might he increased one per 
cent . 

This gave a strong incentive to concentrate 
all the energy, formerly used in financial and 
political intrigue, on the making of gas at the 
lowest possible cost. As a result, the price has 
been reduced to eighty cents. From 1905 to 
1913, $6,247,923.35 in the aggregate has been 
saved to the consumers, and yet dividends have 
been increased some two per cent. 

“It has been proved,” he says, “that a pub¬ 
lic-service corporation may be managed with 


XX 


BRANDEIS 


political honesty and yet successfully. To re¬ 
duce the price of gas we need not only honesty 
but also skill, energy and initiative. And this 
may be best secured by following those lines of 
intelligent self-interest upon which the remark¬ 
able industrial advance of America has pro¬ 
ceeded. Those who manage our public-service 
corporations should be permitted, subject to 
proper safeguards, to conduct the enterprise 
under the conditions which in ordinary busi¬ 
ness have proved a sufficient incentive to attract 
men of large ability and to insure from them 
their utmost efforts for its advancement.” 

THE NEW HAVEN RAILROAD 

Brandeis has led one other fight in New Eng¬ 
land against a big corporation. 

Before 1906 the New York, New Haven & 
Hartford Railroad had been steadily gaining 
control of transportation in New England. 
Among other things it had acquired about 
five hundred miles of trolley lines in Massa¬ 
chusetts contrary to the law of the state. And 
in 1906 the governor warned the legislature 
of the New Haven’s encroaching power, urging 
legislation to prevent it. The New Haven com¬ 
pany contended that having a Connecticut 
charter it was not subject to Massachusetts laws. 


BRANDEIS 


xxi 

It invited the state’s attorney general to test 
the validity of this claim, and agreed pending a 
decision to make no further acquisitions in the 
state. On this understanding the legislature 
adjourned without taking action and the at¬ 
torney general began proceedings. While these 
were pending, however, the New Haven com¬ 
pany, regardless of its promise, acquired more 
than one-third of the stock of the Boston & 
Maine Railroad. The legislature then passed 
an act restraining the New Haven, until July, 
1908, from acquiring additional stock in the 
Boston & Maine or from voting on that already 
acquired. 

Meanwhile public feeling rose high. The 
Anti-Merger League was formed, with Brandeis 
for its counsel. The support of thousands of 
Massachusetts merchants and of commercial 
and civic organizations and labor unions was 
secured. Their campaign was pushed with 
energy, Brandeis engaging in a long series of 
public debates with the New Haven’s vice- 
president. The railroad, too, had strong sup¬ 
port. People were sick of the Boston & Maine’s 
poor service; they believed its management un¬ 
progressive and its financial condition weak, 
and that if the New Haven could gain control it 
would bring up the service. The danger of mo- 


XXII 


BRANDEIS 


nopoly they proposed to remove by legislative 
control. 

Brandeis, however, contended that the Boston 
& Maine was recovering from its financial weak¬ 
ness and could soon provide needed improve¬ 
ments, but that the New Haven had by its 
recent excessive expansion become perilously 
weak, and that the burdens thus assumed must 
not only prevent its making large improvements, 
but would create a heavy charge upon all future 
traffic. Moreover, he cited the scores of rail¬ 
roads, trolley and steamship lines which it had 
already acquired, and claimed that if the Bos¬ 
ton & Maine be added to these, the result must 
be a monopoly of all transportation by land or 
water within New England and also between 
New England and the rest of the country. To 
control a monopoly so enormous, he declared, 
would be impossible. One small group of New 
York financiers would govern absolutely New 
England’s future growth. 

Meanwhile the New Haven had presented a 
bill legalizing the purchase of its Boston & Maine 
stock. This bill was defeated. In the same year 
the state Supreme Court, in the case brought by 
the attorney general, decided that the New 
Haven was subject to Massachusetts laws and 
that in acquiring Boston & Maine stock it had 


BRANDEIS 


xxiii 


violated the statute. Shortly after this, with 
the approval of President Roosevelt, Attorney 
General Bonaparte began suit against the New 
Haven under the Sherman act. The opponents 
of the merger therefore ceased their work, be¬ 
lieving that their fight was won. 

But in 1909 in Washington a new administra¬ 
tion came into power; and in Massachusetts 
a new governor was elected, who was favorable 
to the New Haven. Late in the session this 
governor sent in a special message paving the 
way for a bill which empowered the New Haven 
to acquire through a holding company all the 
stock of the Boston & Maine. Tremendous 
pressure was brought to bear, and the bill was 
passed. “The passage of this bill,” said French, 
the federal district attorney, “does not change 
matters in the slightest degree regarding the 
federal government’s merger suits against the 
New Haven road.” But four days later, on the 
same day that French was pressing the court 
to set down the case for argument, Attorney 
General Wickersham ordered the suit dropped. 

With all legal obstacles thus removed, the 
holding company was formed, and by this means 
the control of New England’s transportation 
was delivered to the New Haven. 

Brandeis predicted an increase in rates if the 


XXIV 


BRANDEIS 


merger were allowed. Taking the two roads’ 
own estimates, their passenger rates were soon 
increased by about $1,500,000 a year, and they 
applied for increases in freight rates which ex¬ 
ceeded $2,000,000 more. “The need for more 
revenue was caused,” Brandeis maintained, 
“not so much by increase in operating expenses 
as by the financial burdens assumed in their 
sudden excessive expansion, purchasing prop¬ 
erties at high values, borrowing money at high 
rates.” 

In no controversy in which he has engaged 
has his judgment been so emphatically and 
dramatically vindicated as here. Month by 
month the operation of what he calls the “in¬ 
exorable law of arithmetic” made itself felt — 
until railroad service in New England, especially 
upon the Boston & Maine, became intoler¬ 
able. Frightful accidents took place. And 
complaints multiplied to such an extent that 
the Interstate Commerce Commission finally 
ordered a thorough investigation of the whole 
situation. The results of this investigation and 
Commissioner Prouty’s report are now well 
known. The criticisms of the New Haven’s 
financial policy made by Brandeis six years be¬ 
fore were more than sustained; and at the pres¬ 
ent time the Department of Justice in Wash- 


BRANDEIS 


xxv 


ington and the Governor of Massachusetts are 
trying to undo the work of their predecessors in 
office, break the New England transportation 
monopoly and restore sane and healthy con¬ 
ditions. 


A BRILLIANT SUCCESS 

Meanwhile Mr. Brandeis had undertaken a 
project which has since met with brilliant 
success. 

In 1905, in the investigation into the Equi¬ 
table Life Assurance Society, as unpaid counsel 
for the protective committee of policy holders, 
he drafted recommendations urging radical 
changes to reduce the enormous waste of the 
system and provide safeguards against abuse. 
It is said that Grover Cleveland, one of the 
newly appointed trustees, gave these recom¬ 
mendations to Paul Morton, the incoming 
president of the Equitable, and told him that 
on these principles the reorganization should 
proceed. They are, in the main, the same prin¬ 
ciples later insisted upon by Charles E. Hughes 
and embodied in the Armstrong bill. 

This work led Brandeis to a close study of the 
insurance business. The total amount of in¬ 
surance in the ninety leading companies he 
found to be nearly thirteen billions of dollars, 


XXVI 


BRANDEIS 


more in amount than the value of all the rail¬ 
roads in the country at that time, their total 
income exceeding the revenues of the federal 
government. Nearly half the total assets were 
in the hands of three Wall Street companies; 
and this vast accumulation of quick capital gave 
them an ever-tightening grip on the business of 
the country. “The economic menace of past 
ages/’ he said in an address at that time, “was 
the dead hand , which gradually acquired a large 
part of all available lands. The greatest eco¬ 
nomic menace of to-day is a very live hand, 
these great insurance companies which control 
so large a part of our quick capital.” 

On the one hand a prodigious concentration 
of money power; on the other, an intimate con¬ 
cern of every man. In the ninety companies 
there were outstanding over 21,000,000 policies 
affecting directly or indirectly about 30,000,000 
men, women and children. And through the 
waste and abuses inherent in the system the cost 
of insurance was terribly high. This was doubly 
true of “industrial insurance,” purchased mainly 
by the poor, the policies being for small amounts 
and the premiums collected weekly from house 
to house. Mainly through this extravagant 
method, about two-fifths of the policy-holders’ 
money went into running expenses. 


BRANDEIS 


XXVll 


Brandeis undertook to work out some plan 
by which the wage-earners of the country might 
get cheaper insurance, and by which in the 
course of time the business might be taken out 
of the hands of a few and placed in social insti¬ 
tutions all over the land. In Massachusetts 
such institutions already existed. There were 
in that state 189 savings banks, managed by 
about three thousand men who regarded them 
as quasi-public trusts and so gave their services. 
The cost of management was less than one-tenth 
of that in insurance companies. Why not add 
insurance departments to these banks? He drew 
up a tentative plan, for months he lectured and 
wrote on the subject, the Savings Bank Insurance 
League was formed, and a bill which he drafted 
was introduced, empowering savings banks of 
the state to establish insurance departments. 

This bill was bitterly opposed by the old in¬ 
dustrial companies. But the League was hard 
at work. Volunteer speakers stumped the 
entire state; for six months Brandeis spoke 
from two to six nights every week; a petition 
of 150,000 names was presented, and tens of 
thousands of letters poured in on the legisla¬ 
ture. In 1907 the bill passed. And by the 
end of 1908, in two banks the system was 
established. 


BRANDEIS 


xxviii 

From their earnings, after paying all charges 
and setting aside all possible reserves, they de¬ 
clared at the end of the first year an 8 }^ per 
cent dividend to the policy holders—a sum equal 
to one month’s premium. And besides, the 
policy holders got a rate twenty-two per cent 
less than that given by the old industrial 
companies. 

Since then two more banks have adopted the 
system, and their reports in January, 1914, 
showed more than eight thousand policies in 
force, representing more than $3,000,000 of in¬ 
surance. A fifth-year dividend has been declared 
on the monthly premium policies, equalling 
twenty per cent of a year’s premiums. 

This reduction has resulted from radical 
changes. In place of the old wasteful method 
of house-to-house solicitation, the League be¬ 
gan a campaign of insurance education. Vol¬ 
unteer speakers, together with paid insurance 
instructors, spoke in factory towns, and the 
manufacturers gave cordial support. Through 
their aid meetings were held, literature was 
distributed, and finally the instructor went 
through the factory talking in person to each 
employee. In this way the business has been 
secured with little expense. And the old method 
of house-to-house collection has been also 


BRANDEIS 


xxix 


done away with. Premiums are paid either 
through the employer or at the bank. 

Two hundred employers of labor throughout 
the state are now co-operating with the banks 
and with the state by becoming unpaid agencies 
for the receipt of applications and the transmis¬ 
sion of premiums of their employees. 

Far more significant than the success of these 
banks has been the effect on the old industrial 
companies. There is space here for but one of 
the concessions made. For more than twenty 
years they had made no reduction in premiums; 
but since the new movement started their pre¬ 
miums have been reduced on an average of 
about twenty per cent. This means a saving to 
Massachusetts wage-earners of over $1,000,000 
a year, and to the people of the country it will 
probably mean within a few years an annual 
saving of from fifteen to twenty millions. 

“Our work so far,” said Brandeis, “has af¬ 
fected only industrial insurance, but I believe 
that workingmen’s insurance in America is 
soon to assume gigantic proportions and be¬ 
come the bulk of all insurance. Shall these 
wage-earners be served by an exploiting busi¬ 
ness, with dangerous power in a few hands, or 
by public and quasi-public institutions all over 
the country?” 


XXX 


BRANDEIS 


SHORTER HOURS FOR WOMEN WORKERS 

In other big struggles affecting wage-earners, 
Brandeis has taken a leading part. One was 
in behalf of our millions of women factory 
workers. 

In 1907, in Oregon, a law restricting women’s 
work in factories and laundries to ten hours in 
one day was contested and carried to the United 
States Supreme Court. And through the Na¬ 
tional Consumers’ League, Brandeis undertook 
its defence. 

The law had been attacked as against the 
constitutional right of freedom of contract. 
This freedom, however, is subject to the police 
powers of the states. If it could be proved that 
the legislature in passing the law had reason¬ 
able grounds for believing that a day longer than 
ten hours is so injurious to women as to be a 
danger to the community, the court must hold 
the law constitutional. 

Brandeis saw that the crux of the case lay in 
the human facts involved. He accordingly 
outlined a brief and called upon the Consumers’ 
League to collect and arrange the facts. Miss 
Josephine Goldmark of the League undertook 
the work. All available evidence was collected. 
With this he went before the court, and the 


BRANDEIS xxxi 

result was a unanimous decision upholding the 
law. 

But he saw that the fight was not over, and 
he determined to strengthen the evidence. 
Under his guidance Miss Goldmark again set 
to work, with a large corps of assistants, to 
prepare an exhaustive brief on the subject. It 
was ready none too soon. In 1909, in Illinois, 
a similar law was contested before the Supreme 
Court of the state, and again Brandeis led the 
defence. The manufacturer’s claim, that a cer¬ 
tain woman thirty-five years in his employ 
could not earn a living wage unless she worked 
over ten hours a day, acted as a boomerang. 
And the result was again a victory. 

In 1911 Brandeis was invited by the attorney 
general of Ohio to assist in the defence of a 
somewhat similar Ohio statute regulating hours 
for women. He submitted a brief in this case 
before the Supreme Court of the state, which 
held the law constitutional. The case was 
carried on appeal to the Supreme Court of the 
United States. Brandeis again filed a brief and 
took part in the oral argument. And the Su¬ 
preme Court, in 1914, upheld the law. In 1912 
he was again active in the defence of the Illinois 
law, which was again the subject of attack, its 
scope having been widely extended. 


XXX11 


BRANDEIS 


In November, 1913, a request for assistance 
came from a new source. This was in regard to 
the minimum wage rulings of the Oregon Indus¬ 
trial Welfare Commission. The commission was 
established by statute in 1913 and empowered 
to establish such wages, hours of labor and 
conditions of work as appeared, after investiga¬ 
tion, to be necessary for preservation of the 
health and welfare of the employees. The 
minimum wages for women employed in fac¬ 
tories and stores were promulgated by the com¬ 
mission in September, 1913. Constitutionality 
of the act under which these orders were issued 
was contested in the courts, and at the com¬ 
mission’s request Brandeis again, with Miss 
Goldmark’s aid, filed a brief showing the rela¬ 
tion of wages to health, morals and efficiency. 
In March, 1914, a unanimous decision was 
handed down sustaining the law. 

In his work in these labor cases there are 
two points of especial significance. 

First, the method of argument marks a revolu¬ 
tionary change. Hitherto such cases had been 
argued deductively , from the legal precedents, 
upon abstract theories of what is right and what 
is wrong. But the method used here is in¬ 
ductive . The first Illinois brief contains only four 
pages of strictly legal argument; the remaining 


BRANDEIS 


xxxiii 


605 pages go straight to the medical, social and 
economic facts involved. And the spirit of 
modern science thus successfully brought into 
court will doubtless have a far-reaching effect on 
future court decisions. 

Second, the brief is significant for what it 
proves beyond its point. For the knowledge of 
the whole civilized world on the subject of 
overwork is assembled here. It is shown that 
in this tense machine age an hour’s work means 
far more than it did a century back; that ex¬ 
cessive work not only weakens the body and 
opens the way to diseases, but itself produces 
an actual poison, “the toxin of fatigue”; that 
fatigue weakens self-control and leads to the 
use of drink and drugs; that overwork tends 
to exhaust the central nervous system upon 
which the vital functions depend; and finally 
that through overwork the danger of accidents 
is increased, the greatest number of accidents 
coming between eleven and twelve in the morn¬ 
ing and between four and six in the afternoon, 
when the senses are dulled by fatigue. 

Overwork is especially fatal to women. By a 
terrific array of evidence it is shown that work¬ 
ing women are sick far more often than men, 
that their mortality is higher, and that in 
thousands of cases the child-bearing function is 


xxxiv 


BRANDEIS 


impaired. Sterility, miscarriage, stillbirth — 
each is common; and children born to exhausted 
women are at birth below normal weight and 
size. Through the mothers weakness and her 
absence from her baby, the infant death rate 
is terribly high, while thousands grow up weak¬ 
lings. And the danger is not to health alone. 
For a mother returning exhausted at night, with 
the cooking and washing still to be done, has 
little will or energy left; and the moral hold of 
the home is lost. The very preservation of a 
people, therefore, is threatened by such over¬ 
work. In districts where it has long existed 
actual race degeneration has set in. 

The evidence shows, on the other hand, that 
shorter hours have resulted in vastly improving 
the whole tone of the community; that they 
have worked no injury to the employer, for by 
the increased efficiency as much work was done 
as before, generally more; and that, instead of 
lowering wages, with the resulting increase of 
output wages also have increased. 

In the face of such evidence it becomes plain 
that a ten-hour law hardly touches this intricate 
problem. Hours of labor both for women and 
men will undoubtedly be still further shortened. 
And as a sound scientific basis for future legis¬ 
lation, this brief has been still further expanded. 


BRANDEIS 


XXXV 


“In every public job that Brandeis has 
tackled,” said one of his friends, “you will find 
this same long-headed view. Out of the thick 
of each fight he is in, he seems to look into the 
future.” 


A GREAT TASK ACHIEVED 

This is true of his work in settling strikes. 

The cloakmakers , strike in New York, in the 
summer of 1910, involved some seventy thousand 
employees and a business of $180,000,000 a year. 
Conditions were bad. The hours were long and 
irregular, and through a system of subcontract¬ 
ing the pay for most workers was wretchedly 
low. The strike was bitter, sudden, chaotic; 
men starved on $1.50 a week, and refused to 
hear of compromise. The dispute had cen¬ 
tred around the “closed shop.” The union 
would listen to no terms without it; employers 
were equally set against it; two attempts at 
conference had split upon this rock. 

Then Brandeis was called in. It was mid¬ 
summer, his time for vacation; but he came at 
once to New York, as usual giving his services. 
He soon won the confidence of both sides. 

“He was a man,” said the union's socialist 
lawyer, “to whom we did not hesitate to talk 
openly from the start. He showed a broad mind 


XXXVI 


BRANDEIS 


and a fine sense of fairness. It was the most 
wonderful handling of a strike situation that 
I’ve ever seen.” 

This is shown by the minutes of the confer¬ 
ence. For the class struggle was here deep, 
fundamental, made bitter by the chaos of the 
past. Repeatedly the two sides clashed. But 
repeatedly, with sound reasoning and demand 
for the facts, the arbitrator came between. 
Knowing the closed-shop issue to be the danger- 
point, he persistently put it off, in order that 
first both sides might see that on all other points 
they could agree. When it came up at last he 
offered a compromise plan (his invention) “the 
preferential union shop.” This was refused, 
and the strike went on. But a month later an 
agreement was reached. Wages were raised, 
hours reduced, the system of subcontracting 
abolished, and many other improvements made. 
But by far the most important result was the 
adoption, in a more definite form, of the Bran- 
deis plan for a preferential union shop. The 
final agreement describes it as follows: 

“A shop where union standards as to working 
conditions, hours of labor and rates of wages 
prevail, and where, when hiring help, union 
men are preferred; it being recognized that 
since there are differences in degree of skill 


BRANDEIS 


xxxvii 


among those employed in the trade, employers 
shall have freedom of selection as between one 
union man and another, and shall not be con¬ 
fined to any list nor bound to follow any pre¬ 
scribed order whatever. . . . The Manufac¬ 
tured Association, however, declare their belief 
in the union, and that all who desire its benefits 
should share in its burdens.” 

To make it effective, provisions were added 
for a price committee, a shop chairman, a com¬ 
mittee on grievances, a board of sanitary con¬ 
trol and a board of arbitration. On this board, 
Brandeis was chosen as the third man. 

During the three years since then, the develop¬ 
ment of the industry has completely justified 
his anticipations. There has been no general 
strike. The rate of wages, increased in 1910, 
has been maintained, and concerns which for 
some time paid below the union scale have been 
compelled to conform to it. In August, 1913, 
a demand having been made for higher wages 
and the matter referred to the Board of Arbi¬ 
tration, the board caused an intensive study 
of the whole subject to be made, the report of 
which will soon appear. The industry has been 
more and more stabilized. The forty-eight-hour 
week has been more strictly adhered to, over¬ 
time has been paid double and there has been 


XXXV111 


BRANDEIS 


an enormous improvement in the sanitary condi¬ 
tions of the shop, a continual raising of the 
standards of health. The machinery of the 
Protocol, or working agreement, has been 
enormously facilitated and improved. A body 
of industrial laws and precedents has grown up 
based on justice to both sides. Of eight thousand 
cases arising in two years, only nine had to be 
referred finally to the Board of Arbitration, the 
others having been settled by the parties them¬ 
selves. Of course there has been agitation and 
misunderstanding; but, where such excitement 
formerly would have led to disastrous strikes, it 
now passes harmlessly over the industry. The 
Board of Arbitration has become a supreme 
industrial court to which great problems of 
fundamental policy alone have been referred. 
A better spirit has prevailed between the two 
parties, a spirit of conciliation. The leaders on 
both sides have been educated to the stand¬ 
point which Brandeis had originally taken, that 
of considering the industry as a whole. It is 
still an experiment, imperfect and full of the 
difficulties inherent in industrial relations. It 
demands the greatest possible self-control on 
both sides. But it contains the germ of a great 
idea; an element of industrial statesmanship. 

“ Prolonged peace and prosperity,” Brandeis 


BRANDEIS 


XXXIX 


maintains, “can rest only on the foundation of 
industrial liberty. Industrial democracy should 
ultimately attend political democracy. Indus¬ 
trial absolutism is not merely impossible in this 
country at the present time, but is most un¬ 
desirable. Our employers can no more afford 
to be absolute masters of their employees than 
they can afford to submit to the mastery of 
their employees. Bluff and bluster have no 
place here. The spirit must be ‘Come, let us 
reason together.’ Such conferences are neces¬ 
sarily time-consuming, but the time cannot be 
better spent. There are no short cuts to evolu¬ 
tion.” 

THE LAWYER IN THE BALLINGER CASE 

Until his appearance before the Interstate 
Commerce Commission as counsel for ship¬ 
pers in the Freight Rate Advance Case, the 
most widely known of all his work in the 
people’s service was done in the Ballinger 
investigation. 

About two weeks before the investigation 
began, he became counsel for Glavis. Those two 
weeks he spent delving into the mass of details 
involved. It was an amazing instance of swift 
absorption. The committee, it was feared, 
would make short work of Glavis; but if this 


xl 


BRANDEIS 


were intended, it was made impossible by the 
brilliant history of the whole matter which 
Brandeis gave at the start. 

His task was hard; for the whole administra¬ 
tion was set against the investigation. To the 
requests for records there were delays, and later 
even denials. But over what records he could 
secure, he used to work in his room late at night, 
and he was often at work again at four o’clock 
in the morning. Out of these dry records he 
tried to build up the part each man had played, 
to visualize the story. And out of this patient 
searching came two disclosures which startled 
the country. 

For their understanding a few dates are 
needed. On August 18, 1909, Glavis submitted 
his charges. On September 6 Ballinger sub¬ 
mitted a mass of documents in reply. On Sep¬ 
tember 13 the President exonerated Ballinger 
and dismissed Glavis. Two months later Glavis 
appealed to the country. On December 21. the 
Senate requested the President to transmit to 
Congress any reports , statements , papers or docu¬ 
ments upon which he had relied in reaching his 
conclusion . And the President complied. 
Among the papers submitted were a summary 
and a report by Attorney General Wickersham, 
dated September n. 


BRANDEIS 


xli 


In the course of time Brandeis began to sus¬ 
pect that these Wickersham papers had not 
been written on September n. If so, why had 
not the President referred to them in his letter 
of September 13? Moreover, they were dated 
only five days after Ballinger had submitted 
his mass of evidence. How could the Attorney 
General have made in five days so careful an 
analysis of the huge mass of confused and intri¬ 
cate papers submitted, so unfair an analysis, 
adroitly keeping back some facts and giving un¬ 
due weight to others? Finally he found definite 
proof. The report referred to a certain statute 
as mentioned by Glavis in his letter. Glavis 
had not mentioned it in his letter to the Presi¬ 
dent. But he had mentioned it in his Collier’s 
article over two months later. 

Still Brandeis hesitated. The officials in¬ 
volved were so high. If he failed to completely 
prove his point, the recoil would be terrific. 
But when Finney, a subordinate to Wickersham, 
was on the stand, Brandeis asked him such 
questions as these: “ What do you know of that 
report? When did you first see it? When did 
you first hear of it?” And though Finney’s 
answers were evasive, from the startled expres¬ 
sion on his face and on certain other faces, 
Brandeis finally made up his mind. He put 


xlii 


BRANDEIS 


the question that afternoon. Had not the At¬ 
torney General antedated his report? 

“The silence in that room,” said one, “was 
instant, terribly intense. For everyone knew 
that before risking such a question, Brandeis 
must have proof of his facts.” Finney evaded 
the question. Two days later Brandeis called 
for a statement from Wickersham. The com¬ 
mittee refused to make the request. But a reso¬ 
lution making a like request was introduced 
into Congress, and in a communication to the 
Committee of the House the Attorney General 
admitted that his report was not written until 
long after the day of its date, long after the 
President’s decision. A similar admission was 
made later by the President. 

At the time of this admission Ballinger was 
on the stand. Brandeis had long been insist¬ 
ing that this chief witness be called. He knew 
the risk he ran of turning the public against him 
if he pressed his man too hard; but he took the 
risk. “I have never heard,” said one lawyer, 
“so relentless an examination. When any other 
man would have stopped out of sheer pity, still 
he kept on.” But the bursts of rage from the 
witness, his misstatements and self-contradic¬ 
tions, had a fatally damaging effect. Repeat¬ 
edly he made denials, which a series of keen, 


BRANDEIS 


xliii 


quiet questions broke down. These questions 
showed a disturbingly accurate knowledge of 
Ballinger’s every move from August 26 to Sep¬ 
tember 13, his itinerary in minutest detail, 
down to the trains he took, exact hours of ar¬ 
rival, who met him at stations, where they went. 
At one point Senator Root intervened. “Mr. 
Brandeis,” he asked indignantly, “were you 
having this man followed by a detective?” 
Brandeis smiled and answered, “No.” 

“As a matter of fact,” as he later told the 
committee, “this wonderful detective work was 
quite simply done. I knew Ballinger’s main 
itinerary. I then secured back copies of the 
local newspapers in the places he visited; and 
in them, quite naturally, I acquired my mar¬ 
vellous knowledge.” 

When Wickersham had made his admission, 
Brandeis began pressing Ballinger upon another 
matter. He knew that Ballinger’s subordinate, 
Lawler, had drafted a letter on which the Presi¬ 
dent had largely based his letter of exoneration. 
This Lawler letter had never been mentioned. 
Brandeis knew of it from Kerby, Lawler’s ste¬ 
nographer, who had refused to come out with 
a statement. He now questioned Ballinger on 
the same subject. And it was when the latter 
showed by his answers his resolve to keep back 


xliv 


BRANDEIS 


the truth that Kerby decided to state what he 
knew. Further, he said he had found the note¬ 
book in which he had taken Lawler’s dictation, 
and had had photographs made of the pages 
containing the letter. Here at last was definite 
proof. 

Close on the Ballinger denial, the Kerby 
statement appeared in a Western paper. The 
telegraphic report, which reached the White 
House at noon, failed to include the fact that 
Kerby had proof. The White House issued a 
denial. Later in the day the full report, in¬ 
cluding the proof, appeared in a Washington 
paper. The next day the President sent to the 
Investigating Committee a long statement ad¬ 
mitting the truth of what Kerby had said. The 
President stated among other things that he 
had asked Mr. Lawler “to prepare an opinion 
as if he were President.” 

From these two exposures it was plain that 
the President, in response to the Senate’s re¬ 
quest, had sent to Congress an important paper 
on which he had not relied in reaching his con¬ 
clusions, because it was not in existence; and 
also that he had omitted to send another import¬ 
ant paper on which he did rely, from which he 
copied portions. These disclosures did much to 
convince the public. For if the administration 


BRANDEIS xlv 

must so shield a man, how unfit must he be to 
continue in office! 

Of the work of Brandeis here, the most inter¬ 
esting part to me is his handling of the reporters. 
From the start, knowing how little he had to 
hope for from the majority of the committee, 
he presented his case direct to the American 
people. Night after night in his room he worked 
with the newspaper men, explaining the day’s 
significant points. And the result of this work 
was great. For Mr. Ballinger’s resignation was 
mainly due to the strong public sentiment made 
through the press. 

In his closing argument, Brandeis stated 
what he believed to be the real significance of 
the work. “This investigation,” he said, “has 
been referred to as a struggle for conservation, 
a struggle against the special interests. It is 
that: but it is far more. In its essence, it is the 
struggle for democracy, the struggle of the small 
man against the overpowering influence of the 
big; politically as well as financially, the struggle 
to establish the right of every American to equal 
justice in the public service as well as in the 
courts, that no official is so highly stationed that 
he may trample ruthlessly and unjustly upon 
even the humblest American citizen. The cause 
of Glavis is the cause of the common people, 


xlvi 


BRANDEIS 


and more especially the cause of the hundreds 
of thousands of government officials.” 

BRANDEIS AND THE RAILROADS 

Not long after this, Brandeis entered a con¬ 
test of greater magnitude than any in which he 
had ever before engaged. He became counsel 
for all the trade organizations of the Atlantic 
seaboard in the hearing on the proposed ad¬ 
vance in railroad rates before the Interstate 
Commerce Commission. 

“I opposed these rates,” he told me, “both 
because the method of raising them, by hori¬ 
zontal, arbitrary and undiscriminating increase, 
was a departure from all previous practice in 
rate making, disregarding the effect of the in¬ 
crease upon the business affected; and also on 
the ground that many of the railroads, if they 
needed additional income at all, needed it be¬ 
cause of a reckless policy of aggrandizement and 
other financial excesses. 

“But the point that struck me most was this: 
While the railroads were seeking to increase 
rates in order to overcome the increase of operat¬ 
ing cost, largely due to increased wages which 
would amount to a small per cent, there were 
immense possibilities of introducing economies 
of many times the amount. For the railroads, 


BRANDEIS 


xlvii 


during the last ten years, through the practical 
elimination of competition and through their 
increase beyond the unit of greatest efficiency, 
had come to be even less economically operated 
than before. The main economies of operation 
they had made were those resulting from the 
levelling of grades, elimination of curves, intro¬ 
duction of larger cars and engines — in short, 
improvement in plant. They had left practi¬ 
cally unworked the field of attaining greater 
efficiency through the new science of management 
— a science which in other industries was al¬ 
ready being developed with wonderful results, 
a science by which the efficiency of the individ¬ 
ual workman was often more than doubled, re¬ 
sulting in both largely increased compensation 
to the worker and increased profit to the 
employer. 

“I therefore urged that if the roads needed 
greater income they should resort to increase 
of managerial efficiency, and that it would but 
put a premium on uneconomical management 
to permit an increase of rates simply because 
there appeared to be need of greater income. 
This policy was particularly dangerous because 
of the open declaration of the railroad presi¬ 
dents that the increases sought were but the 
beginnings of demands for still higher rates, and 


xlviii 


BRANDEIS 


that the community must accustom itself to 
the idea that rates generally would continue to 
increase.” 

The outcome of this controversy is well 
known. The commission refused to allow the 
increase in both the eastern and the western 
divisions of the railroads of the country. Mr. 
Brandeis’s activity not only had the effect of 
concentrating public attention upon the case 
and the real issues involved, but also of creat¬ 
ing widespread and unusal interest in the ques¬ 
tion of scientific management. As one of the 
engineers said: “By a single stroke Brandeis 
created a greater advance in scientific manage¬ 
ment than would otherwise have come in the 
next quarter of a century.” 

“The great fact to remember is this,” he told 
me. “The coming science of management , in 
this century, marks an advance comparable 
only to that made by the coming of the machine 
in the last. The profits from the machine were 
absorbed by capital. But we have developed 
a social sense. And now of the profits that are 
to come from the new scientific management, 
the people are to have their share. These prof¬ 
its are to be immense. On our railroads alone 
at least a million dollars a day might be saved 
by this kind of management. Not all the mate- 


BRANDEIS 


xlix 


rial resources in our land can compare to this 
prodigious field, the possibilities of the science 
which will inprease the efficiency of man. And 
this public domain must not be preempted.” 

What the commission thought of Mr. Bran- 
deis’s work in this case is indicated by the fact 
that in the summer of 1913 they engaged him as 
counsel for the commission itself in the matter 
of the renewed application of the railroads for 
a similar general increase in rates, the case which 
is now going on in Washington. 

BRANDEIS AND THE “ MONEY TRUST ” 

His most recent work, at the time of this 
writing, has been his attack on the “ money 
trust,” a work which has had a large share in 
bringing forward important bills which deal 
with the trusts of the country. 

“On nothing has he ever worked harder,” 
writes Mr. Norman Hapgood, “than on his 
diagnosis of the money trust, and when his life 
comes to be written (I hope many years hence) 
this will be ranked with his railroad work for its 
effect in accelerating industrial changes. It is 
indeed more than a coincidence that so many 
of the things he has been contending for have 
come to pass. It is seldom that one man puts 
one idea, not to say many ideas, effectively be- 


1 


BRANDEIS 


fore the world, but it is no exaggeration to say 
that Mr. Brandeis is responsible for the now 
widespread recognition of the inherent weak¬ 
ness of great size. He was the first person who 
set forth effectively the doctrine that there is 
a limit to the size of greatest efficiency, and the 
successful demonstration of that truth is a pro¬ 
found contribution to the subject of trusts. 
The demonstration is powerfully put in his 
testimony before the Senate Committee in 1911. 
In destroying the delusion that efficiency was 
a common incident of size, he emphasized the 
possibility of efficiency through intensive de¬ 
velopment of the individual, thus connecting 
this principle with his whole study of efficiency, 
and pointing the way to industrial democracy.” 

Such, in brief, is the public work of this man 
in a little over twenty years. For such work he 
has urged the importance of big successful 
lawyers keeping themselves free. He has kept 
himself free: striving to hold a position of abso¬ 
lute independence “ between the wealthy and 
the people.” On the one hand, he has no close 
political ties: he has declined every proffer of 
office, has occasionally even refused to work for 
or against any candidate. On the other, he has 
no connection with any big corporation. “I 
would rather have clients,” he told me, “than 


BRANDEIS 


li 


be somebody’s lawyer.” He has steadily tried 
to rid himself of all property influence; he has 
no investments in the Boston public utilities, 
and made it a rule not to take a financial inter¬ 
est in a business for which he was counsel. His 
income is large, but he spends little. He is a 
generous giver. “I have only one life, and it’s 
short enough,” he said. “Why waste it on 
things that I don’t want most? And I don’t 
want money or property most. I want to be 
free.” 

In his home, the standard set about twenty 
years back has remained the same. He lives in 
a simple house and he has few material wants — 
keeping himself free from the encumbrance of 
things. In his house you at once feel at home. 
He has many warm friends and a wide acquaint¬ 
ance; he is a keen appreciator of men. “ It’s 
hard to interview Brandeis,” said a well-known 
writer. “He wastes your time interviewing 
you” 

Each year more of his time is given freely to 
public work. Each year certain big special 
interests grow more bitter against him, for he 
is a patient, pitiless antagonist, and the reforms 
he proposes go deep. 

“We are sure to have for the next generation 
an ever-increasing contest between those who 


lii 


BRANDEIS 


have and those who have not. There are vital 
economic, social and industrial problems to be 
solved. And for these we need our ablest men. 
The reason why we have not made more progress 
in social matters is that these problems have 
not been tackled by the practical men of high 
ability, like those who have worked on industrial 
inventions and enterprises. We need social in¬ 
ventions , each of many able men adding his 
work until the invention is perfected. 

“I have no rigid social philosophy. I have 
been too intense on concrete problems of practi¬ 
cal justice. And yet I can see that the tendency 
is steadily toward governmental control. The 
government must keep order not only physically 
hut socially . In old times the law was meant to 
protect each citizen from oppression by physical 
force. But we have passed to a subtler civiliza¬ 
tion; from oppression by force we have come 
to oppression in other ways. And the law must 
still protect a man from the things that rob him 
of his freedom, whether the oppressing force 
be physical or of a subtler kind. 

“ There is no such thing as freedom for a man 
who under normal conditions is not financially 
free. We must therefore find means to create 
in the individual financial independence against 
sickness, accidents, unemployment, old age and 


BRANDEIS 


liii 


the dread of leaving his family destitute, if he 
suffer premature death. For we have become 
practically a world of employees; and, if a man 
is to have real freedom of contract in dealing with 
his employer, he must be financially independent 
of these ordinary contingencies. Unless we pro¬ 
tect him from this oppression, it is foolish to call 
him free. Moreover, since most men are em¬ 
ployees and since men must work to live, the 
law should see that they are protected from op¬ 
pression in their work, from excessive hours of 
labor and other conditions injurious not only 
to them alone but through them to the com¬ 
mon good. 

“This principle applies in general to the whole 
question of property rights. Property must be 
subject to that control of property which is 
essential to the enjoyment by every man of a 
free individual life. And when property is used 
to interfere with that fundamental freedom of 
life for which property is only a means , then 
property must be controlled. This applies to the 
regulation of trusts and railroads, public utili¬ 
ties and all the big industries that control the 
necessities of life. Laws regulating them, far 
from being infringements on liberty, are in 
reality protections against infringements on 
liberty. 


liv 


BRANDEIS 


“ Property is only a means'. It has been a 
frequent error of our courts that they have made 
the means an end. Once correct that error, put 
property back into its right place, and the whole 
social-legal conception becomes at once consist¬ 
ent. I see no need to amend our Constitution. 
It has not lost its capacity for expansion to meet 
new conditions, unless it be interpreted by rigid 
minds which have no such capacity. Instead 
of amending the Constitution, I would amend 
men’s economic and social ideals. I believe that 
our judges are as honest as you can make men. 
But like all the rest of us they are subject to 
their environment. And law has always been a 
narrowing, conservatizing profession. In Eng¬ 
land it was always easy for a Tory government 
to find great lawyers for judicial office, but for 
a Liberal government it was hard. And so it 
has been throughout history. Nearly all of 
England’s great lawyers were Tories. 

“What we must do in America is not to at¬ 
tack our judges, but to educate them. All judges 
should be made to feel, as many judges already 
do, that the things needed to protect liberty are 
radically different from what they were fifty 
years back. In some courts the judges’ con¬ 
ceptions of their own powers must also change. 
Some judges have decided a law unconstitu- 


BRANDEIS 


lv 


tional simply because they considered the law 
unwise. These judges should be made to feel 
that they have no such right, that their busi¬ 
ness is not to decide whether the view taken by 
the legislature is a wise view, but whether a 
body of men could reasonably hold such a view. 
In the past the courts have reached their con¬ 
clusions largely deductively from preconceived 
notions and precedents. The method I have 
tried to employ in arguing cases before them has 
been inductive, reasoning from the facts. 

“In general, I believe that the courts and the 
people have been too far apart. There is no 
subject so complex that the people cannot be 
interested in it and made to see the truth about 
it if pains enough be taken; and I believe that a 
common agreement of public sentiment should 
influence the court’s decision on many a question. 

“For the aspirations of the people must have 
adequate legal expression. Otherwise we shall 
have a revolt. The whole industrial world is in 
a state of ferment. It is in the main peaceful, 
and to a considerable extent silent; but there 
is felt to-day very widely the inconsistency in 
this condition of political democracy and in¬ 
dustrial absolutism. The people are beginning 
to doubt whether in the long run democracy and 
absolutism can coexist in the same community; 


lvi 


BRANDEIS 


beginning to doubt whether there is really a 
justification for the great inequalities in the 
distribution of wealth. This movement must 
necessarily progress; the people’s thought will 
take shape in action. And it lies with our lawyers 
to say in what lines that action shall be ex¬ 
pressed: wisely and temperately or wildly and 
in temperately; in lines of evolution or in lines 
of revolution. 

“ Young men who feel drawn to the legal pro¬ 
fession may rest assured that they will find in it 
an opportunity for usefulness which is probably 
unequalled elsewhere. There is and there will be 
a call upon the legal profession to do a great 
work for this country.” 

He is fond of quoting these lines from Eu¬ 
ripides, written over two thousand years back, 
but which have a pregnant meaning for us now: 

Thou hast heard men scorn thy city, call her wild 
Of counsel, mad; thou hast seen the fire of morn 
Flash from her eyes in answer to their scorn! 

Come toil on toil, ’t is this that makes her grand, 

Peril on peril! And common states that stand 
In caution, twilight cities, dimly wise — 

Ye know them, for no light is in their eyes! 

Go forth, my son, and help! 


SUPPLEMENTARY NOTES 


Mr. Poole brings the story of Mr. Brandeis’s 
activities down to 1914. On January 28, 1916, 
President Wilson nominated him to be Associate 
Justice of the Supreme Court of the United 
States; on June 5, 1916, he took his seat upon 
the bench and became Mr. Justice Brandeis. 
Thereafter the record of his labors is written 
largely by himself, in the severe autobiography 
contained in his judicial opinions as recorded in 
the series of United States Reports, those austere 
volumes containing the cases adjudged in the 
Supreme Court, beginning with the October Term 

1916 (242 U. S.-). There is thus a gap of 

two or three years during which Mr. Brandeis 
continued his increasingly fruitful public career 
as a private individual. 

There is an inevitability in the way so organic 
a personality as Mr. Brandeis expresses his life. 
Circumstances furnish occasions; they do not 
determine directions. And so we find that the 
extremely intensive years following those which 
Mr. Poole recorded, until he went on the bench, 
were merely a continuation of devotion to the 


lviii 


SUPPLEMENTARY NOTES 


solution of those economic and social problems 
of American society with which this volume con¬ 
cerns itself. He had practically withdrawn from 
private practice and had given unique meaning 
to what is called the “ public profession of the 
law.” His passion for law and his mastery of 
its processes were enlisted solely in the interest 
of the whole community, whenever some particu¬ 
larly pressing or difficult issue absorbed at once 
his interest and his energies. And the community 
which he thus served was increasingly as wide as 
the nation. Not the least striking characteristic 
of his career is that he continued to be this power¬ 
fully useful public servant as a private individual 
without office, except as special counsel for the 
Interstate Commerce Commission in the famous 
Advance Rate Cases; and these cases he under¬ 
took almost as a judge and not as a partisan, to 
see “that all sides and angles of the case are 
presented of record, without advocating any 
particular theory for its disposition.” 

Thus we find Mr. Brandeis during 1913, 1914, 
and 1915 dealing with industrial problems, rail¬ 
road problems, the adaptation of law to modern 
industry, in similar ways and along similar lines 
to those which Mr. Poole has detailed. He 
pressed before the Supreme Court of the United 
States and those of the several States a spacious 


SUPPLEMENTARY NOTES lix 

conception of the Constitution, capable, as its 
framers intended it tp be, of meeting the changes 
wrought by modern industrial society. With a 
magisterial grasp of the details of industry prob¬ 
ably unparalleled at the American bar, he was 
never diverted by his mastery of business from 
preoccupation with the only valid significance of 
business, namely, a means of satisfying the needs 
of men without sacrificing or stunting the free¬ 
dom of men. “Scientific management,” “waste 
in industry,” “regularity of employment,” the 
various aspects of the various problems of in¬ 
dustrial society, and the different phrases which 
summed up these problems, were simply the con¬ 
crete expressions of a mind disciplined to grapple 
in the concrete with the never-ending challenge 
of making the life of the commonplace individual 
more significant and less commonplace. 

This zest for giving significance to life arises 
from his keen sensitiveness to quality, and not 
because of any uncritical sentimentality. To be 
sure, he has, to a marked degree, the essential 
moral quality which respects the dignity of every 
individual and is eager for conditions which will 
enable this dignity to flower. But no one has 
a deeper regard than Mr. Brandeis for the need 
of intensive cultivation, and no one at the 
bar contributed more eagerly or more effectively 


lx 


SUPPLEMENTARY NOTES 


towards raising the standard of education in his 
own profession. For many years he was an in¬ 
timate counsellor of the Harvard Law School in 
its expanding conception of the functions of the 
law schools of the country, as the promoters of 
legal science and the molders of statesmen as well 
as lawyers. His relation to the Harvard Law 
School symbolizes the dominant impulse in the 
man — he is a social engineer, an educator. All 
his work has been, and is intended to be, chiefly 
educative. Problems with him are never solved. 
Problems to him are merely stages in the con¬ 
tinuous processes of civilization. And so we find 
his insistence on difficulties, on the necessity for 
continuity of effort, on sustained interest, on the 
need of constant alertness to the fact that the 
introduction or the invention of new forces may 
beget new difficulties. This, in turn, makes him 
mindful of the limited range of human foresight, 
and leads him to practise the humility with which 
men ought to forestall the freedom of action of 
those who are to follow. 

His rich and variegated activities in the thick 
of the fight were unexpectedly turned into a 
calmer current when President Wilson appointed 
him to the Supreme Court. But he was not 
allowed to ascend the judicial Olympus until one 
more familiar fight. This time the fight centered 


SUPPLEMENTARY NOTES 


lxi 


about him and he himself could have no share 
in it. As soon as President Wilson sent his name 
to the Senate a fierce storm broke loose, which 
now is so much a part of forgotten history that 
it is difficult to realize that it aroused such 
intensities. One who attacked so many abuses, 
selfishness and ignorance so stubbornly en¬ 
trenched, was bound to evoke the hostility of 
selfishness and ignorance, and the uncritical mis¬ 
understanding generated by miasmic propaganda. 
Here, again, Mr. Brandeis contributed mightily 
to American education. For the ventilation of 
the social and economic issues which were in¬ 
volved in his career, as well as the consideration 
of the implications of the Supreme Court of the 
United States in the life of America, which fol¬ 
lowed his nomination to the Supreme Court, 
added considerably to political understanding. 
Incidentally it afforded the opportunity for 
permanent appraisals of Mr. Brandeis’s career 
and durable characterizations of his qualities. Ex- 
President Eliot of Harvard, viewing the affairs 
of men with his disinterested calm and writing 
from an intimate knowledge of Mr. Brandeis, 
wrote: 

“I have known Mr. Louis D. Brandeis for forty 
years, and believe that I understand his capac¬ 
ities and his character. He was a distinguished 


lxii 


SUPPLEMENTARY NOTES 


student in the Harvard Law School in 1875-78. 
He possessed by nature a keen intelligence, quick 
and generous sympathies, a remarkable capacity 
for labor, and a character in which gentleness, 
courage and joy in combat were intimately 
blended. His professional career has exhibited 
all these qualities, and with them much practical 
altruism and public spirit.” 

President Wilson, in an extraordinary document, 
told the Senate in detail the reasons which moved 
him to name Mr. Brandeis for the Supreme Bench. 
His closing paragraph summarized the matter: 

“ ... I nominated Mr. Brandeis . . . be¬ 
cause it was, and is, my deliberate judgment that, 
of all the men now at the bar whom it has been 
my privilege to observe, test, and know, he is 
exceptionally qualified. I cannot speak too highly 
of his impartial, impersonal, orderly, and con¬ 
structive mind, his rare analytical powers, his 
deep human sympathy, his profound acquaintance 
with the historical roots of our institutions and 
insight into their spirit, or of the many evidences 
he has given of b$ing imbued to the very heart 
with our American ideals of justice and equality 
of opportunity; of his knowledge of modem 
economic conditions and of the way they bear 
upon the masses of the people, or of his genius 
in getting persons to unite in common and har- 


SUPPLEMENTARY NOTES 


lxiii 


monious action and look with frank and kindly 
eyes into each other’s minds, who had before 
been heated antagonists. This friend of justice 
and of men will ornament the high court of which 
we are all so justly proud.” 

This controversy has long been stilled, and the 
author of these essays has by common consent 
already become a great and abiding figure of 
the world’s most powerful court. 

Felix Frankfurter 


Cambridge, Massachusetts 
November i, 1924 










BUSINESS-A PROFESSION 


BUSINESS —A PROFESSION 1 

Each commencement season we are told by 
the college reports the number of graduates who 
have selected the professions as their occupa¬ 
tions and the number of those who will enter 
business. The time has come for abandoning 
such a classification. Business should be, and 
to some extent already is, one of the profes¬ 
sions. The once meagre list of the learned 
professions is being constantly enlarged. Engi¬ 
neering in its many branches already takes rank 
beside law, medicine and theology. Forestry 
and scientific agriculture are securing places of 
honor. The new professions of manufacturing, 
of merchandising, of transportation and of 
finance must soon gain recognition. The estab¬ 
lishment of business schools in our universities 
is a manifestation of the modern conception of 
business. 

1 An address delivered at Brown University Commencement Day, 
1912. Published in “ System,” October, 1912. 



2 


BUSINESS — A PROFESSION 


The peculiar characteristics of a profession 
as distinguished from other occupations, I take 
to be these: 

First. A profession is an occupation for which 
the necessary preliminary training is intellec¬ 
tual in character, involving knowledge and to 
some extent learning, as distinguished from 
mere skill. 

Second . It is an occupation which is pursued 
largely for others and not merely for one’s 
self. 

Third. It is an occupation in which the 
amount of financial return is not the accepted 
measure of success. 

Is not each of these characteristics found to¬ 
day in business worthily pursued? 

The field of knowledge requisite to the more 
successful conduct of business has been greatly 
widened by the application to industry not 
only of chemical, mechanical and electrical 
science, but also the new science of manage¬ 
ment; by the increasing difficulties involved 
in adjusting the relations of labor to capital; 
by the necessary intertwining of social with in¬ 
dustrial problems; by the ever extending scope 
of state and federal regulation of business. 
Indeed, mere size and territorial expansion 
have compelled the business man to enter upon 


BUSINESS —A PROFESSION 


new and broader fields of knowledge in order to 
match his achievements with his opportunities. 

This new development is tending to make 
business an applied science. Through this de¬ 
velopment the relative value in business of the 
trading instinct and of mere shrewdness have, 
as compared with other faculties, largely di¬ 
minished. The conception of trade itself has 
changed. The old idea of a good bargain was a 
transaction in which one man got the better of 
another. The new idea of a good contract is a 
transaction which is good for both parties to it. 

Under these new conditions, success in busi¬ 
ness must mean something very different from 
mere money-making. In business the able man 
ordinarily earns a larger income than one less 
able. So does the able man in the recognized 
professions — in law, medicine or engineering; 
and even in those professions more remote from 
money-making, like the ministry, teaching or 
social work. The world’s demand for efficiency 
is so great and the supply so small, that the 
price of efficiency is high in every field of human 
activity. 

The recognized professions, however, defi¬ 
nitely reject the size of the financial return as 
the measure of success. They select as their 
test, excellence of performance in the broadest 


4 


BUSINESS —A PROFESSION 


sense — and include, among other things, ad¬ 
vance in the particular occupation and service to 
the community. These are the basis of all worthy 
reputations in the recognized professions. In 
them a large income is the ordinary incident of 
success; but he who exaggerates the value of the 
incident is apt to fail of real success. 

To the business of to-day a similar test must 
be applied. True, in business the earning of 
profit is something more than an incident of 
success. It is an essential condition of success; 
because the continued absence of profit itself 
spells failure. But while loss spells failure, 
large profits do not connote success. Success 
must be sought in business also in excellence 
of performance; and in business, excellence of 
performance manifests itself, among other things, 
in the advancing of methods and processes; 
in the improvement of products; in more perfect 
organization, eliminating friction as well as 
waste; in bettering the condition of the work¬ 
ingmen, developing their faculties and promot¬ 
ing their happiness; and in the establishment 
of right relations with customers and with the 
community. 

In the field of modern business, so rich in 
opportunity for the exercise of man’s finest and 
most varied mental faculties and moral quali- 


BUSINESS —A PROFESSION 


5 


ties, mere money-making cannot be regarded as 
the legitimate end. Neither can mere growth in 
bulk or power be admitted as a worthy ambition. 
Nor can a man nobly mindful of his serious 
responsibilities to society, view business as a 
game; since with the conduct of business human 
happiness or misery is inextricably interwoven. 

Real success in business is to be found in 
achievements comparable rather with those of 
the artist or the scientist, of the inventor or the 
statesman. And the joys sought in the profes¬ 
sion of business must be like their joys and not 
the mere vulgar satisfaction which is experi¬ 
enced in the acquisition of money, in the exer¬ 
cise of power or in the frivolous pleasure of 
mere winning. 

It was such real success, comparable with the 
scientist’s, the inventor’s, the statesman’s, which 
marked the career of William H. McElwain of 
Boston, who died in 1908 at the age of forty-one. 
He had been in business on his own account 
but thirteen years. Starting without means, 
he left a fortune, all of which had been earned 
in the competitive business of shoe manufac¬ 
turing, without the aid of either patent or trade¬ 
mark. That shows McElwain did not lack the 
money-making faculty. His company’s sales 
grew from $75,957 in 1895 to $8,691,274 in 1908. 


6 


BUSINESS —A PROFESSION 


He became thus one of the largest shoe 
manufacturers in the world. That shows he 
did not lack either ambition or organizing abil¬ 
ity. The working capital required for this 
rapidly growing business was obtained by him 
without surrendering to outside investors or to 
bankers any share in the profits of business: all 
the stock in his company being owned either by 
himself or his active associates. That shows 
he did not lack financial skill. 

But this money-making faculty, organizing 
ability and financial skill were with him serv¬ 
ants, not masters. He worked for nobler ends 
than mere accumulation or lust of power. In 
those thirteen years McElwain made so many 
advances in the methods and practices of the 
long-established and prosperous branch of in¬ 
dustry in which he was engaged, that he may be 
said to have revolutionized shoe manufacturing. 
He found it a trade; he left it an applied science. 

This is the kind of thing he did: In 1902 the 
irregularity in the employment of the shoe 
worker was brought to his attention. He be¬ 
came greatly impressed with its economic waste, 
with the misery to the workers and the demorali¬ 
zation which attended it. Irregularity of em¬ 
ployment is the worst and most extended of 
industrial evils. Even in fairly prosperous 


BUSINESS —A PROFESSION 


7 


times the workingmen of America are subjected 
to enforced idleness and loss of earnings, on the 
average, probably ten to twenty per cent of their 
working time. The irregularity of employment 
was no greater in the McElwain factories than 
in other shoe factories. The condition was 
not so bad in shoe manufacturing as in many 
other branches of industry. But it was bad 
enough; for shoe manufacturing was a seasonal 
industry. Most manufacturers closed their fac¬ 
tories twice a year. Some manufacturers had 
two additional slack periods. 

This irregularity had been accepted by the 
trade — by manufacturers and workingmen 
alike — as inevitable. It had been bowed to as 
if it were a law of nature — a cross to be borne 
with resignation. But with McElwain an evil 
recognized was a condition to be remedied; and 
he set his great mind to solving the problem of 
irregularity of employment in his own factories; 
just as Wilbur Wright applied his mind to the 
aeroplane, as Bell, his mind to the telephone, 
and as Edison, his mind to the problems of elec¬ 
tric light. Within a few years irregularity of 
employment had ceased in the McElwain fac¬ 
tories; and before his death every one of his 
many thousand employees could find work three 
hundred and five days in the year. 


8 


BUSINESS —A PROFESSION 


Closely allied with the establishment of reg¬ 
ularity of employment was the advance made 
by McElwain in introducing punctual delivery 
of goods manufactured by his company. Shoes 
are manufactured mainly upon orders; and the 
orders are taken on samples submitted. The 
samples are made nearly a year before the goods 
are sold to the consumer. Samples for the 
shoes which will be bought in the spring and 
summer of 1913 were made in the early summer 
of 1912. The solicitation of orders on these 
samples began in the late summer. The manu¬ 
facture of the shoes commences in November; 
and the order is filled before July. 

Dates of delivery are fixed, of course, when 
orders are taken; but the dates fixed had not 
been taken very seriously by the manufac¬ 
turers; and the trade was greatly annoyed by 
irregularities in delivery. McElwain recog¬ 
nized the business waste and inconvenience at¬ 
tendant upon such unfulfilled promises. He 
insisted that an agreement to deliver on a certain 
day was as binding as an agreement to pay a 
note on a certain day. 

He knew that to make punctual delivery 
possible, careful study and changes in the meth¬ 
ods of manufacture and of distribution were 
necessary. He made the study; h ntroduced 



/ 


BUSINESS— A PROFESSION 


9 


the radical changes found necessary; and he so 
perfected his organization that customers could 
rely absolutely upon delivery on the day fixed. 
Scientific management practically eliminated 
the recurring obstacles of the unexpected. To 
attain this result business invention of a high 
order was of course necessary — invention di¬ 
rected to the departments both of production 
and of distribution. 

The career of the Filenes of Boston affords 
another example of success in professionalized 
business. In 1891 the Filenes occupied two 
tiny retail stores in Boston. The floor space 
of each was only twenty feet square. One was 
a glove stand, the other a women’s specialty 
store. Twenty years later their sales were nearly 
$5,000,000 a year. In September, 1912, they 
moved into a new building with more than nine 
acres of floor space. But the significant thing 
about their success is not their growth in size or 
in profits. The trade offers many other exam¬ 
ples of similar growth. The pre-eminence of 
the Filenes lies in the advance which has been 
made in the nature, the aims and the ideals of 
retailing, due to their courage, initiative, per¬ 
sistence and fine spirit. They have applied 
minds of a high order and a fine ethical sense to 
the prosaic and seemingly uninteresting busi- 


10 


BUSINESS —A PROFESSION 


ness of selling women’s garments. Instead of 
remaining petty tradesmen, they have become, 
in every sense of the word, great merchants. 

The Filenes recognized that the function of 
retail distribution should be undertaken as a 
social service, equal in dignity and responsi¬ 
bility to the function of production; and that 
it should be studied with equal intensity in 
order that the service may be performed with 
high efficiency, with great economy and with 
nothing more than a fair profit to the retailer. 
They recognized that to serve their own cus¬ 
tomers properly, the relations of the retailer to 
the producer must be fairly and scientifically 
adjusted; and, among other things, that it was 
the concern of the retailer to know whether the 
goods which he sold were manufactured under 
conditions which were fair to the workers — 
fair as to wages, hours of work and sanitary 
conditions. 

But the Filenes recognized particularly their 
obligations to their own employees. They 
found as the common and accepted condi¬ 
tions in large retail stores, that the employees 
had no voice as to the conditions or rules 
under which they were to work; that the 
employees had no appeal from policies pre¬ 
scribed by the management; and that in the 


BUSINESS —A PROFESSION 


11 


main they were paid the lowest rate of wages 
possible under competitive conditions. 

In order to insure a more just arrangement 
for those working in their establishment, the 
Filenes provided three devices: 

First. A system of self-government for em¬ 
ployees, administered by the store co-opera¬ 
tive association. Working through this asso¬ 
ciation, the employees have the right to appeal 
from and to veto policies laid down by the man¬ 
agement. They may adjust the conditions 
under which employees are to work, and, in 
effect, prescribe conditions for themselves. 

Second. A system of arbitration, through the 
operation of which individual employees can 
call for an adjustment of differences that may 
exist between themselves and the management 
as to the permanence of employment, wages, 
promotion or conditions of work. 

Third. A minimum wage scale, which pro¬ 
vides that no woman or girl shall work in their 
store at a wage less than eight dollars a week, no 
matter what her age may be or what grade of 
position she may fill. 

The Filenes have thus accepted and applied 
the principles of industrial democracy and of 
social justice. But they have done more — 
they have demonstrated that the introduction 


n BUSINESS —A PROFESSION 

of industrial democracy and of social justice is 
at least consistent with marked financial suc¬ 
cess. They assert that the greater efficiency of 
their employees shows industrial democracy and 
social justice to be money-makers. The so- 
called “ practical business man,” the narrow 
money-maker without either vision or ideals, 
who hurled against the Filenes, as against Mc- 
Elwain, the silly charge of being “theorists,” 
has been answered even on his own low plane 
of material success. 

McElwain and the Filenes are of course ex¬ 
ceptional men; but there are in America to-day 
many with like perception and like spirit. The 
paths broken by such pioneers will become the 
peopled highways. Their exceptional methods 
will become accepted methods. Then the term 
“Big business” will lose its sinister meaning, 
and will take on a new significance. “Big busi¬ 
ness” will then mean business big not in bulk 
or power, but great in service and grand in 
manner. “Big business” will mean profes¬ 
sionalized business, as distinguished from the 
occupation of petty trafficking or mere money¬ 
making. And as the profession of business 
develops, the great industrial and social prob¬ 
lems expressed in the present social unrest will 
one by one find solution. 


THE EMPLOYER AND TRADES 
UNIONS 1 


Mr . Chairman and Gentlemen: — 

I am glad to be with you. A reunion of vet¬ 
erans is enjoyable, particularly so if the war has 
been successful — properly so if the right has 
triumphed, as in the recent struggle in which 
we were engaged. 

Let me review the facts: — 

Prior to February i, 1901, the minimum 
wage of compositors in Boston was $15 per 
week. A three years’ agreement then entered 
into between your association and the Boston 
Typographical Union No. 13 fixed the minimum 
weekly wage at $16 for the first year, and $16.50 
for the two succeeding years. Shortly before 
February 1, 1904, the Union demanded that the 
minimum wage be further increased to $18. 
You offered an increase to $17 for the first year, 
and $18 thereafter. The Union rejected your 
offer, and ordered a general strike. On February 
1, 1904, the compositors went out. 

No principle of trade unionism was involved, 

1 An address delivered at the annual banquet of the Boston Typo- 
thetae, April 21, 1904, for whom Mr. Brandeis had acted as counsel 
in a memorable struggle with the Typographical Union. 


14 


BUSINESS —A PROFESSION 


nor the question of increased wages for an in¬ 
definite period in the future. It was at most a 
matter of $i a week for one year — the equiva¬ 
lent of what would be lost by each man in wages 
if the strike lasted just three weeks. To strike 
for such a stake was shockingly bad business. 
It was followed quickly by acts which also 
shocked the conscience. 

The United Typothetae had made a four 
years’ contract with the International Printing 
Pressmen and Assistants’ Union. This con¬ 
tract provided for arbitration of grievances, 
provided expressly against sympathetic strikes, 
and recognized expressly the open shop. In 
defiance of this agreement and in the face of the 
protest of Martin P. Higgins, the President of 
that Union, the Boston Typographical Union 
No. 13 undertook, by the promise of strike ben¬ 
efits, which in many cases exceeded the wages 
the men were receiving, to induce pressmen and 
feeders, who had no grievance whatever, to 
leave your employ. That was morally wrong. 
We believed it to be also illegal. You applied 
to the Supreme Judicial Court of Massachu¬ 
setts for redress, and were accorded the pro¬ 
tection of an injunction. 

This was the beginning of the end; but the 
end itself came in a manner even more desira- 


THE EMPLOYER AND TRADES UNIONS 15 

ble. After the strike had continued five weeks, 
and the men had lost twice the paltry sum for 
which alone they struck, Mr. Lynch, the Presi¬ 
dent of the International Typographical Union, 
and other members of its Executive Committee, 
came to Boston. They investigated the facts. 
They doubtless realized the hopelessness of the 
contest. They certainly realized the wrong¬ 
fulness of inducing pressmen and feeders who 
had no grievance to go out in defiance of their 
contract. The strike was declared off — uncon¬ 
ditionally. No promise of any kind was made 
to the compositors, pressmen and feeders who 
went out. The open shop was formally de¬ 
clared in every office. Many of the men who 
went out are still without work, and the strike 
benefits have ceased. The dynasty which for 
years has governed the Boston Typographical 
Union with unwisdom is tottering. The secre¬ 
tary has already resigned. The president, it is 
said, will not seek re-election. 

So much for the past: what shall the future 
be? What should you do to make it an era of 
peace and prosperity? The answer involves 
a discussion of certain broad principles which, 
in my opinion, should govern the relations of 
employer and employee in all branches of in¬ 
dustry, though in their application they would, 


16 


BUSINESS —A PROFESSION 


like every rule, be subject to exceptions more 
or less temporary, dependent upon the peculiar 
facts of the individual case. 

First. Prolonged peace and prosperity can 
rest only upon the foundation of industrial lib¬ 
erty. The peace which employers should seek 
is not the peace of fifty years ago, when the em¬ 
ployers were absolute masters of the situation. 
The peace which the employees should seek is 
not the peace of mediaeval guilds, with their 
numberless restrictions. Industrial liberty must 
attend political liberty. The lead which Amer¬ 
ica takes in the industrial world is no doubt due 
to our unbounded resources; but of these re¬ 
sources none are so great as the spirit and the 
ability incident to a free people. We lead the 
world industrially, not so much because the re¬ 
sources of nature are unbounded, as because the 
faculties and aspirations of men are compara¬ 
tively unfettered. The prosperity of New Eng¬ 
land — this poor rich country — is ample evi¬ 
dence of this. We must have, therefore, for the 
development of our industries, as for the devel¬ 
opment of our citizens, the highest degree of lib¬ 
erty attainable. Industrial democracy should 
ultimately attend political democracy. Indus¬ 
trial absolutism is not merely impossible in this 
country at the present time, but is most unde- 


THE EMPLOYER AND TRADES UNIONS 17 


sirable. We must avoid industrial despotism, 
even though it be benevolent despotism. Our 
employers can no more afford to be absolute 
masters of their employees than they can afford 
to submit to the mastery of their employees, 
than the individual employees can afford to have 
their own abilities or aspirations hampered by 
the limitations of their fellows. Some way must 
be worked out by which employer and employee, 
each recognizing the proper sphere of the other, 
will each be free to work for his own and for 
the common good, and that the powers of the 
individual employee may be developed to the 
utmost. To attain that end, it is essential that 
neither should feel that he stands in the power 
— at the mercy — of the other. The sense of 
unrestricted power is just as demoralizing for 
the employer as it is for the employee. Neither 
our intelligence nor our characters can long 
stand the strain of unrestricted power. Every 
business requires for its continued health the 
memento mori of competition from without. 
It requires, likewise, a certain competition within, 
which can exist only where the ownership and 
management on one hand, and the employees 
on the other, shall each be alert, hopeful, self- 
respecting, and free to work out for themselves 
the best conceivable conditions. 


18 


BUSINESS —A PROFESSION 


Second. The right of labor to organize is 
recognized by law, and should be fully recog¬ 
nized by employers. There will be in most 
trades little probability of attaining the best 
conceivable conditions unless in some form a 
union of the employees exists. It is no answer 
to this proposition to point to instances of trade- 
union excesses and of the disasters which at¬ 
tended them. We believe in democracy despite 
the excesses of the French Revolution. Nor are 
claims of the trades unions disproved by point¬ 
ing to the instances where the best results have 
been attained in businesses in which no trace of 
unionism existed. Wise, far-seeing employers 
act upon the spirit or the hint of union demands 
instead of waiting to have them enforced. “A 
word to the wise is sufficient.” The steps in 
advance have been taken often for the express 
purpose of preventing trades-unionism from 
finding a lodgment, often, unconsciously, as a 
result merely of the enlightenment which comes 
with the necessary thinking that trade-union 
agitation compels. Such successful businesses 
are, indeed, the greatest triumphs of unionism; 
and their marked success is due in large part to 
the fact that they have had all the advantages 
of unionism without having to bear the disad¬ 
vantages which, in their imperfect state, attend 


THE EMPLOYER AND TRADES UNIONS 19 

the unions. We must not forget the merits of 
unionism in our righteous indignation against 
certain abuses of particular unionists. 

Most people admit the immense service which 
the labor unions have rendered to the commu¬ 
nity during the last twenty-five years in raising 
of wages, shortening of the hours of labor, bet¬ 
tering of conditions under which labor is per¬ 
formed, and protecting women and children from 
excessive or ill-timed work; but the services 
which the labor unions can render in the future 
are even greater than they have rendered in the 
past. The employer needs the unions “to stay 
him from the fall of vanity”; the employees need 
them for their own protection; the community 
needs them to raise the level of the citizen. 

Strong, stable trades unions can best serve 
these ends. The leaders of strong unions only 
will adequately feel the terrible responsibility 
resting upon them. The leaders of stable unions 
only can get the experience essential to an ade¬ 
quate performance of their duties; and experi¬ 
ence almost invariably makes the leaders rea¬ 
sonable and conservative. Only long service as 
a labor leader can give that knowledge of the 
employer’s side of the controversy which is es¬ 
sential to its just and proper settlement. Peace 
and prosperity, therefore, are not to be attained 


20 


BUSINESS —A PROFESSION 


by any attempt to weaken trades unions. Our 
hope lies rather in their growing strength and 
stability. 

At all events, the employer, whether he wills 
it or not, has in most trades to reckon with the 
union. What shall his attitude be? 

Third. Employees are entitled to be repre¬ 
sented by union officers. A short time ago it 
was common for an employer not to “ recognize 
the union.” That is, although he knew a large 
number of his employees were members of the 
union, he refused to negotiate in matters relat¬ 
ing to the employees with its officers, on the 
theory that the employer should deal directly 
and only with his employees, and may not brook 
the interference of an outsider. This plausible 
but unsound theory has yielded generally to 
facts and to reason. One hears little now of 
employers arbitrarily refusing to deal with the 
chosen representatives of union employees. 
But, of course, recognizing that union officers 
are the proper representatives of the employees 
in any matter requiring consideration by the em¬ 
ployer does not mean yielding to union demands, 
any more than recognizing a customer means 
conceding his demands. 

How, then, shall the employer deal with the 
union’s representative when a demand is made 


THE EMPLOYER AND TRADES UNIONS 21 


to which he feels he cannot accede, or when a 
controversy has already arisen? Many are ready 
with the answer: Arbitration; others again say: 
Conciliation. Arbitration and conciliation are 
each at times wise, but each involves the inter¬ 
cession of third parties. In arbitration it is the 
referee; in conciliation, the common friend. 
Ordinarily, neither is needed. 

Fourth. Employers and employees should try 
to agree. A very able man, who taught the law 
of partnership at Harvard, once asked the class, 
“What shall be done if a controversy arises be¬ 
tween partners?” The students suggested one 
legal remedy after another, — a receiver, an in¬ 
junction, a dissolution. “No,” said he, “they 
should try to agree.” In the most important 
sense, employer and employee are also partners. 
They, too, should try to agree; and the attempt 
made in a properly conducted conference will 
generally be successful. 

Nine-tenths of the serious controversies which 
arise in life result from misunderstanding, re¬ 
sult from one man not knowing the facts which 
to the other man seem important, or otherwise 
failing to appreciate his point of view. A 
properly conducted conference involves a frank 
disclosure of such facts — patient, careful argu¬ 
ment, willingness to listen and to consider. 


22 


BUSINESS —A PROFESSION 


Bluff and bluster have no place there. The 
spirit must be, “Come, let us reason together.” 
Such a conference is impossible where the em¬ 
ployer clings to the archaic belief commonly ex¬ 
pressed in the words, “This is my business, and 
I will run it as I please.” It is impossible where 
the labor representative, swaggering in his 
power to inflict injury by strike and boycott, is 
seeking an unfair advantage of the employers, 
or would seek to maintain even a proper position 
by improper means. Such conferences will suc¬ 
ceed only if employer and employee recognize 
that, even if there be no so-called system of 
profit-sharing, they are in a most important 
sense partners, and that each is entitled to a 
patient hearing, with a mind as open as the 
prejudice of self-interest permits. 

The potent force of right reasoning in such 
conferences can hardly be overestimated. If 
applied with tact and in the aid of right action, 
it is almost irresistible. But it must be used 
only in the right spirit and in the aid of right 
action. 

Fifth . It is necessary that the owners or the 
real managers of the business should themselves 
participate in the conferences, partly because 
the labor problem requires the best thought 
available and the most delicate treatment, and 


THE EMPLOYER AND TRADES UNIONS 23 


partly because the employees feel better satisfied 
and are apt to receive better treatment when 
they are dealing with the ultimate authority and 
not with an intermediary. Such conferences are 
necessarily time-consuming, but the time cannot 
be better spent. They are as instructive to the 
employer as to the employees. We must re¬ 
member that there are no short cuts in evolution. 

The greatest obstacle to the success of such 
conferences is the suspicion of the labor repre¬ 
sentatives — a suspicion due partly to igno¬ 
rance of the employer’s actual attitude, partly 
to knowledge of individual acts of unfairness of 
other employers, and partly also to a belief, 
which is frequently erroneous, that the employer 
will get some advantage through his supposed 
superior skill and ability. Suspicion yields only 
to experience; and for this reason, among others, 
the conferences are most successful when par¬ 
ticipated in by labor leaders of long standing. 
The more experienced the representative, the 
better. 

But conferences, though wisely conducted 
and with the best of intentions on either side, 
do not always result in agreement. Men fail 
at times to see the right; and, indeed, what is 
right is often in doubt. For such cases arbitra¬ 
tion affords frequently an appropriate remedy. 


u 


BUSINESS —A PROFESSION 


This remedy deserves to take its place among 
the honorable means of settling those questions 
to which it properly applies. Questions arise 
however, which may not be arbitrated. Differ¬ 
ences are sometimes fundamental. Demands 
may be made which the employer, after the full¬ 
est consideration, believes would, if yielded to, 
destroy the business. Such differences cannot be 
submitted to the decision of others. Again, the 
action of the union may appear to have been 
lawless or arbitrary, a substitution of force for 
law or for reason. 

What, then, should be the attitude of the 
employer? 

Sixth. Lawless or arbitrary claims of organ¬ 
ized labor should be resisted at whatever cost. I 
have said that it is essential in dealing with these 
problems that the employer should strive only 
for the right. It is equally as important that 
he should suffer no wrong to be done unto him. 
The history of Anglo-Saxon and of American 
liberty rests upon that struggle to resist wrong— 
to resist it at any cost when first offered rather 
than to pay the penalty of ignominious surrender. 
It is the old story of the “ship money,” of “the 
writs of assistance/’ and of “taxation without 
representation.” The struggle for industrial 
liberty must follow the same lines. 


THE EMPLOYER AND TRADES UNIONS 25 

If labor unions are arbitrary or lawless, it is 
largely because employers have ignominiously 
submitted to arbitrariness or lawlessness as a 
temporizing policy or under a mistaken belief 
as to their own immediate interests. You hear 
complaint, too, of lawless strikers in the legis¬ 
lature and in the city council; but, if lawless¬ 
ness and corruption exist there, it is largely 
because the great corporations and moneyed in¬ 
terests have forgotten the good old maxim, “Not 
one cent for tribute, but millions for defence.” 

The world was aghast last summer at the dis¬ 
closure of Sam Parks’s corruption. The dese¬ 
cration of Labor Day by his glorification, after 
he had been sentenced to Sing Sing, was shock¬ 
ing to every sense of decency. This false loy¬ 
alty of the unionists very properly alienated 
from trades unions much of the public favor 
which John Mitchell had gained for them. But, 
after all, Sam Parks’s corruption and the terri¬ 
ble losses and suffering which attended the pro¬ 
longed strike were largely the fruit of the em¬ 
ployers’ wrong-doing. Who bribed Sam Parks? 
The rich contractors, — pre-eminently the huge 
corporations on whose boards of directors sat 
many of the leading financiers of the country. 
They corrupted Sam Parks or fed his corrup¬ 
tion, corrupted him either to get an undue ad- 


BUSINESS — A PROFESSION 


vantage over their employees or over their com¬ 
petitors, or as a seemingly inexpensive way of 
meeting what they deemed to be unreasonable 
and extortionate demands. At last employers, 
employees, and a large part of the community 
paid the penalty. Fortunately, the world is so 
ordered that we must pay the penalty for our 
sins, be they sins of commission or omission, 
of doing wrong or of suffering wrong to be done 
unto us. 

You may compromise a matter of wages, 
you may compromise a matter of hours — if 
the margin of profit will permit. No man can 
say with certainty that his opinion is the right 
one on such a question. But you may not com¬ 
promise on a question of morals, or where there 
is lawlessness or even arbitrariness. Industrial 
liberty, like civil liberty, must rest upon the 
solid foundation of law. Disregard the law in 
either, however good your motives, and you 
have anarchy. The plea of trades unions for 
immunity, be it from injunction or from liability 
for damages, is as fallacious as the plea of the 
lynchers. If lawless methods are pursued by 
trades unions, whether it be by violence, by in¬ 
timidation, or by the more peaceful infringe¬ 
ment of legal rights, that lawlessness must be 
put down at once and at any cost. 


THE EMPLOYER AND TRADES UNIONS 27 

Likewise industrial liberty must rest upon 
reasonableness. We gain nothing by exchang¬ 
ing the tyranny of capital for the tyranny of 
labor. Arbitrary demands must be met by de¬ 
termined refusals, also at any cost. 

In our international relations we are told that 
the best assurance of peace lies in preparedness 
for war. This is equally true in the industrial 
world. The union has its strike fund. The 
employer must also pay in some form the pre¬ 
mium for insuring an honorable peace. He has 
adopted long since the guaranty fund for his 
credits, the depreciation fund for his machinery. 
He should now adopt another reserve fund to 
guard him against the losses attendant upon 
strikes, and, above all, should so organize his 
business as to be less vulnerable to them. Known 
weakness invites arbitrary attack, as oppor¬ 
tunity makes the thief. 

These are the principles by which alone the 
labor problem can be satisfactorily solved. They 
are broad, indeed; for they are the eternal prin¬ 
ciples of 

Liberty, Fraternity, Justice, Honor. 


HOURS OF LABOR 1 


Mr. Chairman and Gentlemen :— 

Whether in a particular business at a par¬ 
ticular time the hours of labor should be mate¬ 
rially shortened presents usually a grave ques¬ 
tion. Such a change, owing to competition, 
direct or indirect, may seriously threaten the 
prosperity or even the life of the business; or 
the demand for the reduction of hours may be 
coupled with other terms or conditions clearly 
inadmissible. In such cases strenuous resist¬ 
ance becomes the duty of the employer. But, 
however commendable the resistance of the 
employer to a reduction of hours may be in a 
particular case, we should all recognize that a 
short working day is in general essential to the 
attainment of American economic, social and 
political ideals, and our efforts should be 
directed to that end. 

Mr. Gompers quoted some time ago the say¬ 
ing of Heine that “ Bread is Freedom.” The 
ancient Greeks, recognizing that “Man can- 

1 An address delivered at the first Annual meeting of the Civic 
Federation of New England, January n, 1906. 


HOURS OF LABOR 


29 


not live by bread alone,” declared that “ Leisure 
is Freedom.” Undoubtedly “ A full dinner pail” 
is a great achievement as compared with an 
empty one, but no people ever did or ever can 
attain a worthy civilization by the satisfac¬ 
tion merely of material needs, however high 
these needs are raised. The American stand¬ 
ard of living demands not only a high minimum 
wage, but a high minimum of leisure, because we 
must meet also needs other than material ones. 

The welfare of our country demands that 
leisure be provided for. This is not a plea for 
indolence. Leisure does not imply idleness. 
The provision for leisure does not contemplate 
working less hard. It means ability to work 
not less, but more — ability to work at some¬ 
thing besides bread-winning — ability to work 
harder while working at bread-winning, and 
ability to work more years at bread winning. 
We need leisure, among other reasons, because 
with us every man is of the ruling class. Our 
education and condition of life must be such 
as become a ruler. Our great beneficent ex¬ 
periment in democracy will fail unless the 
people, our rulers, are developed in character 
and intelligence. 

Now consider what, particularly in our 
large cities, the chance for such development 


30 


BUSINESS —A PROFESSION 


is for men and women who are required regu¬ 
larly to work ten or even nine hours a day. 
A nine-hour work-day means, including the 
noon hour, ten hours at the factory or work¬ 
shop. That means in Boston for most of those 
who live in the suburbs eleven or twelve hours 
devoted to the workshop and getting to and 
from it. When you add the time necessarily 
spent at breakfast and supper, dressing and 
undressing, house work, shopping and sleep, 
you find that at least twenty-one of the twenty- 
four hours are devoted to subsistence and a 
small fraction of the day is left for living , even 
if after the long work day one is in a condition 
mentally and physically to really live. 

To attain proper development of character, 
mind and body, a short working day is essen¬ 
tial, and the eight-hour day is in most occu¬ 
pations and for most people not too short. For 
the exceptional occupation and for the excep¬ 
tional man in any occupation, no general rule 
is required; and right thinking on this subject 
cannot be aided by reference to such excep¬ 
tional instances. Most professions, many posi¬ 
tions in business, and some in trades fall within 
the class of excepted occupations. Good work 
in such occupations almost necessarily brings 
with it joy, because it implies development of 


HOURS OP LABOR 


31 


faculties and, ordinarily, pecuniary advance¬ 
ment. In every occupation there are such pos¬ 
sibilities for the exceptional man. But in most 
industrial occupations — in the unskilled trades 
and in many so-called skilled trades — the 
limits of development and of financial success 
for any individual are soon reached, and conse¬ 
quently there is little joy in such work except 
as compared with the hours of idleness, or such 
satisfaction as comes to the needy in securing 
the means of subsistence. 

And what is necessary to living as distin¬ 
guished from subsisting? 

In the first place, bodily health is neces¬ 
sary; that is, not merely freedom from illness, 
but continued physical ability to work hard. 
For those engaged in the more favored occupa¬ 
tions, like the professions, and the higher posi¬ 
tions in business and some trades, such health, 
including the postponement of old age, has been 
measurably attained by better conditions of 
living, and notably by outdoor recreation. 
What has been found necessary for continued 
health and working capacity for those engaged 
in these favored occupations we should seek 
to make attainable for all our citizens. The 
burden and waste to the community and to the 
individual, and the suffering attendant upon 


32 


BUSINESS —A PROFESSION 


sickness and premature superannuation, may 
be and should be lessened by a shortening of 
the hours of labor so as to permit of proper 
out-door recreation. 

In the second place, mental development is 
necessary. Massachusetts, recognizing the ed¬ 
ucation of her citizens to be an essential con¬ 
dition of a free and prosperous people, has 
made compulsory the schooling of her children 
to the age of fourteen, has prohibited their 
working in manufacturing or mercantile estab¬ 
lishments under the age of fourteen, and has 
withheld the right to vote from illiterate adults 
as inexorably as from idiots. But the intellec¬ 
tual development of citizens may not be al¬ 
lowed to end at fourteen. With most people 
whose minds have really developed, the age of 
fourteen is rather the beginning than the end 
of the educational period. The educational 
standard required of a democracy is obviously 
high. The citizen should be able to compre¬ 
hend among other things the many great and 
difficult problems of industry, commerce and 
finance, which with us necessarily become 
political questions. He must learn about men 
as well as things. 

In this way only can the Commonwealth be 
saved from the pitfalls of financial schemers on 


HOURS OF LABOR 


33 


the one hand or of ambitious demagogues on the 
other. But for the attainment of such an edu¬ 
cation, such mental development, it is essential 
that the education shall be continuous through¬ 
out life; and an essential condition of such con¬ 
tinuous education is free time, that is, leisure — 
and leisure does not imply merely a time for 
rest, but free time when body and mind are 
sufficiently fresh to permit of mental effort. 
There is full justification for the common prac¬ 
tice in trades of charging at the rate of fifty 
per cent additional for work in excess of the 
regular hours. Indeed, I doubt whether that 
rate of pay is not often grossly inadequate to 
compensate for what it takes out of the employee. 
An extra hour of labor may render useless those 
other hours which might have been devoted 
to development, or to the performance of other 
duties, or to pleasure. The excess load is waste¬ 
ful with man as well as with horses or vehicles 
or machinery. Whether the needed education 
of the citizens is to be given in classes or from 
the political platform, in the discussion of the 
lodges or in the trades unions, or is to be gained 
from the reading of papers, periodicals, or books, 
freshness of mind is imperative; and to the 
preservation of freshness of mind a short work 
day is for most people essential. 


34 


BUSINESS —A PROFESSION 


Bodily and mental health and development 
will furthermore tend to promote innocent, ra¬ 
tional pleasures and, in general, better habits of 
living. Such conditions will tend to lessen the 
great curse of drink, and with it some of the 
greatest burdens of the individual and of society. 

It is, of course, no answer to the plea for a 
shorter work day to say that the leisure result¬ 
ing from shorter hours may not be profitably 
employed. The art of using leisure time, like 
any other, must be learned; but it is certain 
that the proper use of leisure, as of liberty, can 
never be attained except by those who have 
the opportunity of leisure or of liberty. 

Nor is it an answer to the plea for a shorter 
work day to say that most workingmen secure 
a certain amount of free time through the irreg¬ 
ularity of their work. Such free time is liter¬ 
ally time lost. Such irregular excessive free 
time presents an even greater evil than that of 
excessive work. 

Although the reduction of the hours of labor 
is clearly desirable, it may, as already stated, 
be impossible, on account of competition or 
other cause, to grant the reduction at a partic¬ 
ular time in a particular business. But in my 
opinion employers are apt to exaggerate the 
resulting loss of earnings, at least in the long 


HOURS OF LABOR 


35 


run. Greater freshness, better health and men¬ 
tal development that go with shorter hours may 
be relied upon within reasonable limits to make 
up, in many businesses at least, in part, for a 
shortening of working time, where the em¬ 
ployer receives, as he should, the full co-oper¬ 
ation of the employees to secure the largest 
possible production. 

Obviously no limitation should be imposed 
upon the output of the individual, nor any rule 
be insisted upon by the employees which would 
hamper the most efficient use of machinery. 
Such arbitrary restrictions are wasteful and 
uneconomic at all times, and necessarily act as 
a brake on the movement towards shorter hours. 
The natural gain in vigor and working effi¬ 
ciency on the part of the employee should be 
allowed to show itself in the shop results. If 
this gain in potential efficiency is nullified by 
artificial limitations on what and how much a 
man shall do, with the facilities placed at his 
disposal, the decrease in working time must 
inevitably mean increased cost, without either 
economic or moral justification, and under such 
circumstances the employer has no other course 
open to him than that of resistance to any 
attempt to reduce the working time. 

If in any case we should find that, despite 


36 BUSINESS —A PROFESSION 

the fullest co-operation of employees, the re¬ 
duced working time results in immediate eco¬ 
nomic loss, the welfare of our democratic com¬ 
munity compels us to work nevertheless for a 
reasonably short work day as a condition essen¬ 
tial to the making of good citizens. 


ORGANIZED LABOR AND 
EFFICIENCY 1 


The assertion that American prosperity is 
due to our great natural resources is only partly 
true. The fertile fields of the West would 
have brought us little wealth, but for mechan¬ 
ical science, and the development of agri¬ 
cultural machinery which eliminates waste in 
human labor. 

In New England, particularly, our necessi¬ 
ties and not our resources were the real cause 
of our prosperity. A poor soil drove us to 
manufacturing. High wages necessitated the 
saving of human labor and became the mother 
of our inventions, giving us labor-saving ma¬ 
chinery. That the people of the East have 
not attained even greater general well-being 
is due, in large part, to the fact that the sup¬ 
ply of foreign low-priced workingmen made 
it possible to meet the demand for higher 
wages by means other than the elimination 
of labor waste. Human nature, like the in- 

1 An Address before The Boston Central Labor Union on April 2, 
1911. Published in “ The Survey,” April 22, 1911. 


38 


BUSINESS —A PROFESSION 


animate, seeks the path of least resistance. To 
think hard and persistently is painful. The 
path of the pioneer is beset with obstacles. 
It was easier to tap the inexhaustible foreign 
labor supply than to devise and to introduce 
better methods and better management. In¬ 
stead of keeping down the labor cost by elim¬ 
inating unnecessary human effort and increas¬ 
ing the productivity of the individual, we met 
the workingman’s demand for higher wages 
by increasing the supply of workers. Instead 
of conserving the workingmen, we accepted the 
substitutes for those who had been incapacitated 
by disease or accident resulting from excessive 
toil or improper conditions of employment. 

Fortunately a new necessity has intervened: 
the awakened social sense of the community, 
with its longing for a truer democracy. This 
great ethical movement for real brotherhood 
of man reinforces the demand of the work¬ 
ingman for wages, hours and conditions which 
will permit of his living according to those higher 
standards essential to life, health and the 
performance of the duties of citizenship in a 
democracy. These new and increasing demands 
have created a new necessity for economy 
in production. And scientific management 
comes prepared to relieve that necessity by 


ORGANIZED LABOR AND EFFICIENCY 39 


a revolution in industry comparable only to 
that effected in the transition from hand 
labor to machinery. 

It is important that the scope and incidents 
of scientific management be not misunderstood. 

So much has been said of increasing the 
efficiency of labor that the importance of in¬ 
creasing the efficiency of materials, of plant, 
of working capital, and of improving service 
has not been fully appreciated. And yet 
the economies and the profits arising from the 
scientific handling of those factors in business 
are probably, in the aggregate at least, as great 
as from the increased efficiency of labor itself. 

Saving the waste in materials is attained 
in part through securing that article which is 
determined by scientific tests to be best adapted 
to the needs; and incidentally proper tests tend 
to eliminate dishonesty in purchasing. Saving 
of waste in material is attained in part by so 
utilizing it that a lower cost results, even if the 
article was purchased at a higher price. It is 
attained in part through proper methods of 
storage and accounting, which prevent actual 
waste of the material itself and dishonesty in 
its use. 

Saving in plant is attained not only by 
adopting the best, but by so equalizing, plac- 


40 


BUSINESS— A PROFESSION 


ing and using the equipment through careful 
planning as to secure practically its full use 
all the time; thus reducing the capital in¬ 
vested upon which charges for depreciation, 
interest or rental, taxes and insurance, must be 
earned. 

Saving in working capital is attained by 
so controlling and linking the quantity of 
supplies necessarily carried, and so eliminat¬ 
ing delays in the process of manufacture, 
as to reduce materially the amount invested 
in raw material and supplies and in work in 
process. 

Improving the service so as to secure cer¬ 
tainty and prompt deliveries reduces expense 
and annoyances, and vastly increases the suc¬ 
cesses and profits of the sales department. 

Scientific management seeks to do for in¬ 
dustry systematically and comprehensively in 
conserving effort, materials and capital, what 
heretofore has been done sporadically and par¬ 
tially. Its engineers refuse to recognize that 
there is any legitimate sphere in industry for 
ignorance or lack of skill. Ignorance and un¬ 
skilfulness necessarily spell waste, — and waste 
is sinful, whether it be due to lack of train¬ 
ing, of selection, of equipment or of planning. 

In discussing the efficiency of labor a con- 


ORGANIZED LABOR AND EFFICIENCY 41 


struction altogether too narrow has been given 
by some to the term “labor.” The labor to be 
made more effective is that of the managers 
and high-salaried officials quite as much as 
that of the wage-earners. Indeed, the in¬ 
creased efficiency of the wage-earner is not 
possible until the heavy demands which scien¬ 
tific management makes upon those control¬ 
ling and directing the business, including 
superintendents and foremen, are fully met. 
Increased efficiency must begin with those 
higher up. This is of the essence of scientific 
management. 

Some persons unfamiliar with the princi¬ 
ples and application of scientific management 
have assumed that there is in it something 
hostile to labor, and particularly to organized 
labor. This is absolutely unfounded. 

First: They have assumed that the aim of 
scientific management is “speeding up”; that 
it seeks to make the men work harder, thus 
exhausting the workingmen. Such criticism 
shows complete misconception of scientific 
management. Conserving human effort, and 
the man, is a fundamental tenet of scientific 
management. Among other things, it de¬ 
mands careful training of the workingman: and 
the employer’s investment involved in that 


42 


BUSINESS —A PROFESSION 


training creates a special incentive to the em¬ 
ployer to retain his employee and to conserve 
his powers. 

When Fred W. Taylor, with infinite pa¬ 
tience and genius, discovered the laws by 
which a given quantity of pig iron might be 
loaded into a car or a given quantity of coal 
be shovelled by hand in a third or fourth of 
the time ordinarily taken, he was protecting his 
workmen, not exhausting them. 

The larger production incident to scientific 
management is not attained by “ speeding up.” 
It comes largely from removing the obstacles 
which annoy and exhaust the workman — ob¬ 
stacles for which he is not, or should not be 
made, responsible. The management sees to it 
that the best possible way of doing the job is 
shown the worker; that is, the way which takes 
least time, which takes least effort, and which 
produces the best result. The management 
sees to it that the worker’s machine is always 
in perfect order. The management sees to it 
that he is always supplied with the necessary 
materials. The management sees to it that 
the work comes to him at proper times, with 
proper instructions and in proper condition. 
Relieved of every unnecessary effort, of every 
unnecessary interruption and annoyance, the 


ORGANIZED LABOR AND EFFICIENCY 43 


worker is enabled without greater strain to 
furnish much more in production. And under 
the exhilaration of achievement he develops his 
capacity. 

Second: Closely associated with the errone¬ 
ous idea that scientific management means 
“speeding up” is the objection to scientific 
management because of the bonus system. 
That objection assumes that scientific man¬ 
agement is the bonus system. The protest 
of labor against the bonus system is in part 
well founded; because the bonus is apt to do 
more harm than good when applied other¬ 
wise than as a part of the system of scientific 
management. The bonus system is a common 
incident under scientific management; but it 
must not be supposed that it is scientific man¬ 
agement. There has been a great deal of scien¬ 
tific management without the application of 
the bonus system at all. But it is an integral 
part of scientific management that the work¬ 
ingman should get a “square deal,” that he 
should get a proper share of the profit which 
he aids in producing, that his achievement 
should secure an appropriate reward. And in 
practice it has been found that this can be done 
usually more fairly through the bonus system 
than by any other available method of compen- 


44 


BUSINESS —A PROFESSION 


sation. But by the bonus system must be 
understood something very different from the 
bonus system which has been applied in many 
establishments to produce “ speeding up.” It 
involves these essential conditions: 

1. A scientific investigation in detail of each 
piece of work, and the determination of the 
best method and the shortest time in which 
the work can be done. 

2 . A teacher capable of teaching the best 
method and the shortest time. 

3 . Reward for both teacher and pupil when 
the latter is successful. 

Has anybody ever heard of the bonus sys¬ 
tem operating unfavorably to labor where 
these conditions have existed? 

Higher wages, to be provided by the bonus 
system or otherwise, constitute but one of the 
ways in which scientific management will ad¬ 
vance the condition of the laborer. The work¬ 
ingman needs, besides higher wages, among 
other things, shorter hours of work. What 
greater hope can there be for shorter hours 
than that afforded by scientific management, 
the purpose of which is to eliminate, in every 
way, waste of human labor? If the produc¬ 
tivity of the individual man is increased, per¬ 
haps even doubled or trebled, there will come 


ORGANIZED LABOR AND EFFICIENCY 45 


with it the possibility of largely reducing the 
hours of work. 

We are agitating now for the eight-hour 
day already introduced in many industries and 
in the public service. We are far from at¬ 
taining the ideal; but we should not forget 
that it is due to science in business, to the 
labor-saving machines which have already so 
largely increased the productivity of man, that 
we have been able to make some progress 
toward our ideal working day. A hundred 
or even fifty years ago the working day was 
from twelve to fifteen hours long in many 
industries in which it is now but eight or 
nine. 

With higher wages and shorter hours, the 
greatest need of the working man is regular¬ 
ity of employment. Irregularity of employ¬ 
ment creates hardships and demoralization of 
every kind. It is the most sinful waste. 

The introduction of scientific management 
in business has, wherever applied, made regu¬ 
larity of employment its prime aim. It could 
not be otherwise; because irregularity is the 
most potent cause of waste, not only of labor, 
but of plant and of capital. The existence of 
irregularity of employment is one of the great¬ 
est reproaches to modern business. It proves 


46 


BUSINESS —A PROFESSION 


that the management has not done its part; 
and the very essence of scientific management 
is to relieve the workingman from these con¬ 
ditions and hardships which arise from the 
failure of the management to do its duty. 

Third: Again, some persons have expressed 
their apprehension of scientific management, as 
if it were inconsistent with, or at least hostile 
to, unionism. This rests upon an entire mis¬ 
conception. 

The essence of unionism is collective bar¬ 
gaining; that is, instead of the employer deal¬ 
ing individually with each employee, he deals 
with a large body through their representa¬ 
tives, in respect to the rate of wages and the 
hours and conditions of employment. Is there 
not just as broad a sphere for collective bar¬ 
gaining in shops where scientific management 
has been introduced as where it has not? Col¬ 
lective bargaining may fix the minimum wage, 
be it by the day or by the piece; collective 
bargaining may fix the bonus, if any: where 
it shall begin; its rate of increase; and how 
it shall be applied; may fix the hours of labor 
and all the other conditions of employment 
just as much as if the management were of 
the old rule-of-thumb, chaotic type. Surely 
it is not inconsistent with the principles of 


ORGANIZED LABOR AND EFFICIENCY 47 


collective bargaining that one worker may 
earn more than another; for in most success¬ 
ful unions, like the cigarmakers and the boot 
and shoe workers, most of the operatives are 
on piece work, and the earnings of some work¬ 
ers are double or treble those of others doing 
like work in the same shop. 

Fourth: Again, some persons have objected to 
scientific management on the ground that it 
would throw workmen out of employment. This 
has not been the result, and will rarely be. 

Scientific management undertakes to secure 
greater production for the same or less effort; 
but that does not mean that less people will 
have work to do. If only the same amount 
were to be produced, the same number of per¬ 
sons might well be employed to do it, if they 
worked less hours or less hard. But a more 
satisfactory answer is found in the fact that 
the amount of products which can be con¬ 
sumed will depend practically upon the ability 
to buy. 

If goods can be purchased cheaper, more 
can be bought for the same money. And 
more will be bought; at least if wages remain 
the same or increase. The problem is exactly 
the same which was presented when the cost 
of transportation was reduced by substituting 


48 


BUSINESS — A PROFESSION 


railroads for the stage coach, and the cost of 
goods was lowered by substituting machinery 
for hand labor. Has anyone ever known the 
demand for labor to decrease when profits 
were large? The demand for labor grows be¬ 
cause the demands of the people grow with 
the ability to supply them. 

Fifth: It has been suggested by some that 
scientific management will displace the ineffici¬ 
ent. On the contrary, it helps the “ inefficient ” 
most. 

Scientific management recognizes the right 
of those less expert in the work to advance 
to greater efficiency, and the importance to 
the employer of training his workmen to be 
competent. It therefore provides through the 
most practical teachers for careful training of 
men to work in the best manner and to de¬ 
velop habits of industry, instead of letting the 
“devil take the hindmost” and exposing the 
less competent to the probability of discharge. 
It supplies instruction, and offers to the teach¬ 
ers special incentives if they succeed in bring¬ 
ing up the hindmost. 

The social gains to the workingman through 
scientific management are greater even than 
the financial. He secures the development and 
rise in self-respect, the satisfaction with his 


ORGANIZED LABOR AND EFFICIENCY 49 


work, which in almost every line of human 
activity accompany great accomplishment by 
the individual. Eagerness and interest take 
the place of indifference, both because the 
workman is called upon to do the highest 
work of which he is capable, and also because 
in doing this better work he secures appro¬ 
priate and substantial recognition and reward. 
Under scientific management men are led, not 
driven. Instead of working unwillingly for 
their employer, they work in co-operation with 
the management for themselves and their em¬ 
ployer in what is a “ square deal/’ 

As stated above, scientific management of¬ 
fers the means of meeting our social demands. 
The great advance created by the introduc¬ 
tion of machinery we permitted, in large 
measure, to be dissipated socially — instead of 
utilizing the opportunity fully to raise the 
standard of our civilization. Another great 
opportunity is offered us. Shall we seize it? 
And I think that means primarily, will organ¬ 
ized labor seize it? 

If the fruits of scientific management are 
directed into the proper channels, the work¬ 
ingman will get not only a fair share, but 
a very large share of the additional profits 
arising from improved industry. In order 


50 


BUSINESS — A PROFESSION 


that the workingman may get this large share 
of the benefits through higher wages, shorter 
hours and better working conditions, the labor 
unions must participate in fixing those wages, 
hours and conditions, and in determining the 
application to the various businesses of the 
principles of scientific management. Unless 
the workingman is so represented, there must 
be danger that his interest will not be properly 
cared for; and he cannot be properly repre¬ 
sented except through organized labor. This, 
then, is the supreme opportunity for organized 
labor. 

Will you utilize it to the full? 


EFFICIENCY BY CONSENT 


It was Frederick W. Taylor’s purpose to make 
the laborer worthy of his hire; to make the hire 
worthy of the laborer; to make the standard of 
living and the conditions of working worthy to be 
called American. The American standard of liv¬ 
ing implies a wage adequate for proper housing 
and food and clothing, for proper education and 
recreation, and for insurance against those con¬ 
tingencies of sickness, accident, unemployment, 
premature death or superannuation, which fall so 
heavily upon the working classes. That standard 
implies hours of labor sufficiently short to permit 
those who work to perform also their duties as 
citizens and to share in the enjoyment of life. 
That standard implies postponement of the work¬ 
ing period to an age which enables the child to 
develop into a rounded man or woman. That 
standard implies working conditions which are 
not only consistent with the demands of health 
and safety, but are also such as may make work 
for others what it was for Taylor — the greatest 
of life’s joys. 

Taylor recognized that in order to make such 


52 


BUSINESS—A PROFESSION 


a standard of living and of working attainable, 
the productivity of man must be greatly in¬ 
creased; that waste must be eliminated, and par¬ 
ticularly the waste of effort which bears so heavily 
upon the worker. And yet the man who sought 
so to develop industry as to enable labor to reach 
these higher standards of working and of living, 
met, throughout his life, widespread opposition 
from those whom he sought particularly to help. 
Let all who are undertaking to carry forward his 
work recognize this hostility as a fact of funda¬ 
mental importance, for it presents the main 
problem which confronts scientific management. 

The causes of this hostility are twofold: 

First. Only a part of the necessary industrial 
truths have as yet been developed. 

Second . The necessary assent to the applica¬ 
tion of these truths has not been obtained. 

LABOR MUST BE CONSERVED AND DEVELOPED 

Taylor was a great scientist. He established 
certain truths, fundamental in their nature. But 
he obviously covered only a part of the field of 
inquiry. The truths he discovered must be fur¬ 
ther developed and they must be supplemented 
by and adjusted to other truths. The greater 
productivity of labor must not only be attainable, 
but attainable under conditions consistent with 


EFFICIENCY BY CONSENT 


53 


the conservation of health, the enjoyment of work, 
and the development of the individual. The facts 
in this regard have not been adequately estab¬ 
lished. In the task of ascertaining whether pro¬ 
posed conditions of work do conform to these 
requirements, the laborer should take part. He is 
indeed a necessary witness. Likewise in the task 
of determining whether in the distribution of the 
gain in productivity justice is being done to the 
worker, the participation of representatives of 
labor is indispensable for the inquiry which in¬ 
volves essentially the exercise of judgment. 

Furthermore, those who undertake to apply the 
truths which Taylor disclosed must remember 
that in a democracy it is not sufficient to have 
discovered an industrial truth, or even the whole 
truth. Such truth can rule only when accompa¬ 
nied by the consent of men. 

We who have had occasion to consider the 
hostility of labor leaders to the introduction of 
scientific management, know that the hostility 
has in large measure been due to misunderstand¬ 
ing. Much of all the waste which Taylor under¬ 
took to eliminate has no direct relation to the 
specific functions of the workingman. It deals 
with waste in machinery, in supplies, in planning, 
in adjustment of production and distribution — 
matters in which changes cannot possibly affect 


54 


BUSINESS—A PROFESSION 


the workman injuriously. And yet we found in 
many leaders of labor undiscriminating opposi¬ 
tion to the whole of the so-called Taylor system. 
But even if we succeed through education in 
eliminating the general hostility to the introduc¬ 
tion of scientific management in departments of 
the business which do not directly affect labor, 
there will remain.a wide field where the proposed 
changes do directly affect labor in which there is 
determined opposition. This opposition can be 
overcome only through securing the affirmative 
cooperation of the labor organizations. 

LABOR MUST BE CONVINCED THAT INDUSTRIAL 
TRUTHS ARE HUMAN TRUTHS 

In a democratic community men who are to be 
affected by a proposed change of conditions should 
be consulted, and the innovators must carry the 
burden of convincing others at each stage in the 
process of change that what is being done is right. 
Labor must have throughout an opportunity of 
testing whether that which is being recorded as a 
truth is really a truth, and whether it is the whole 
truth. Labor must not only be convinced of the 
industrial truths — which scientific management 
is disclosing — but must also be convinced that 
those truths are consistent with what may be 
termed human truths. Is the greater productiv- 


EFFICIENCY BY CONSENT 


55 


ity attained clearly consistent with the health of 
the body, the mind, and the soul of the worker? 
Is it consistent with industrial freedom? Is it con¬ 
sistent with greater joy in work, and generally in 
living? These are questions which must be an¬ 
swered in the affirmative, and to the satisfaction, 
not of a few merely, but of the majority of those 
to be affected. 

LABOR CONSENT AND COOPERATION 
MUST BE OBTAINED 

To do honor to Mr. Taylor and worthily to 
carry forward his work, those who are his dis¬ 
ciples, and those who may become such, should 
recognize that they have in the solution of these 
questions a call upon them for patient effort, no 
less exacting and severe than that to which Taylor 
subjected himself when pursuing the law of cut¬ 
ting steel. Every step in the installation and the 
working out of scientific management calls for 
such cooperation by representatives of labor. 
The obstacles to securing it are great. Twenty- 
five years may be required to remove them fully. 
But whatever the time required fully to convince 
organized labor, it must be given, if our work is 
to be well done. The consent and the cooperation 
of the worker so represented must be secured. 
In no other way can we attain in full measure the 


56 


BUSINESS—A PROFESSION 


increase of productivity upon which our well¬ 
being so largely depends. In no other way can 
we secure that joy in work without which in¬ 
crease of productivity will not bring greater 
happiness. In no other way can we attain that 
freedom and development of the worker without 
which even his greater happiness would not pro¬ 
mote the general welfare. Let us work unremit¬ 
tingly in the spirit of Taylor to solve the problem 
he left unsolved. In the solution of that problem 
— which in a true sense is the labor problem — 
the greatest honor will be done to his memory 
and the greatest service to mankind. 


THE ROAD TO SOCIAL EFFICIENCY 1 


Throughout the civilized world a devel¬ 
oping sense of social responsibility has com¬ 
pelled the community to support in some 
manner its needy members, whatsoever the 
cause of their inability to support themselves. 

In granting this aid we are passing from 
sporadic, emotional charity to organized chari¬ 
ties, and from mere relief to preventive meas¬ 
ures. We have learned that financial depend¬ 
ence among the wage-earners is due, in large 
part, to sickness, accident, invalidity, super¬ 
annuation, unemployment or to premature 
death of the breadwinner of the family. Con¬ 
tingencies like these, referred to in the indi¬ 
vidual case as a misfortune, are now recog¬ 
nized as ordinary incidents of the lives of the 
wage-earners. And since our existing indus¬ 
trial system is converting an ever-increasing 
percentage of the population into wage-earners, 
the need of providing indemnity against finan¬ 
cial losses from such ordinary contingencies in 

1 An address before the National Congress of Charities and Cor¬ 
rection at Boston on June 8, 1911. Published in “The Outlook,” 
June 10,1911. 


58 


BUSINESS —A PROFESSION 


the workingman’s life has become apparent. 
So sickness and death benefits and methods of 
compensation for accidents have been resorted 
to. But this partial workingman’s insurance 
has served mainly in making clear the need 
of a comprehensive system which shall extend 
protection also to the wage-earners in case of 
invalidity, superannuation or unemployment, 
and to the widows and orphans left helpless by 
the premature death of husband or father. 
In this movement to establish a comprehensive 
system of workingmen’s insurance, Germany, 
France, and latterly England have already 
advanced far. 

The United States must follow on the same 
path, for the conditions which have led to 
the introduction of workingmen’s insurance 
abroad are universal in their operation. Be¬ 
sides, the form and aims of our Government 
should lead us to action, as well as the sense 
of social responsibility. American democracy 
rests upon the basis of the free citizen. We 
accord (to the men) universal suffrage. We 
urge strenuously upon every voter the duty of 
exercising this right. We insist that the voter 
should exercise it in the interest of others as 
well as of himself. We give thus to the citizen 
the rights of a free man. We impose upon him 


THE ROAD TO SOCIAL EFFICIENCY 59 


a duty that can be intrusted with safety only 
to free men. Politically, the American work¬ 
ingman is free — so far as law can make him 
so. But is he really free? Can any man be 
really free who is constantly in danger of be¬ 
coming dependent for mere subsistence upon 
somebody and something else than his own 
exertion and conduct? Men are not free while 
financially dependent upon the will of other in¬ 
dividuals. Financial dependence is consist¬ 
ent with freedom only where claim to sup¬ 
port rests upon right, and not upon favor. 

President Cleveland’s epigram that “it is the 
duty of the citizen to support the Government, 
not of the Government to support the citizen,” 
is only qualifiedly true. Universal suffrage 
necessarily imposes upon the State the obli¬ 
gation of fitting its governors — the voters — 
for their task; and the freedom of the indi¬ 
vidual is as much an essential condition of suc¬ 
cessful democracy as his education. If the 
Government permits conditions to exist which 
make large classes of citizens financially de¬ 
pendent, the great evil of dependence should at 
least be minimized by the State’s assuming, or 
causing to be assumed by others, in some form 
the burden incident to its own shortcomings. 

The cost of attaining freedom is usually 


60 


BUSINESS —A PROFESSION 


high; and the cost of providing for the work¬ 
ingman, as an essential of freedom, a compre¬ 
hensive and adequate system of insurance will 
prove to be no exception to this general rule. 
But, however large the cost, it should be 
fairly faced and courageously met. For the 
expense of securing indemnity against the finan¬ 
cial losses attending accident, sickness, inva¬ 
lidity, premature death, superannuation and 
unemployment should be recognized as a part 
of the daily cost of living, like the more imme¬ 
diate demands for rent, for food and for 
clothing. So far as it is a necessary charge, 
it should be met now as a current expense, in¬ 
stead of being allowed to accumulate as a debt 
with compound interest to plague us hereafter. 

Few intelligent property owners omit to in¬ 
sure against fire. Everybody recognizes the 
fire insurance premium as a current expense. 
And yet the chance of loss by fire is very slight 
as compared with the chance of loss of earn¬ 
ings by sickness, accident or premature death. 
Every intelligent manufacturer makes in some 
form a regular charge for depreciation of ma¬ 
chinery and plant. And yet the depreciation of 
man through invalidity and superannuation is no 
less certain, and frequently more severe, than 
the depreciation of machinery. Every in- 


THE ROAD TO SOCIAL EFFICIENCY 61 

telligent manufacturer recognizes rent, inter¬ 
est and taxes as current daily charges which 
continue although his plant is shut down or 
operates at less than full capacity. The man¬ 
ufacturer makes allowance for this in calcu¬ 
lating the cost of production as an extra charge 
to be met from the earnings of active days. 
But the cost to the employer of carrying an 
unused plant is not as great relatively as the 
cost to the employee of carrying himself and 
family while unemployed. The manufacturer 
who fails to recognize fire insurance, depre¬ 
ciation, interest and taxes as current charges 
of the business treads the path to bankruptcy. 
And that nation does the like which fails to 
recognize and provide against the economic, 
social and political conditions which impose 
upon the workingman so large a degree of 
financial dependence. 

What sum would be required annually to 
provide an adequate system of workingmen’s 
insurance cannot be determined from existing 
data. The cost would obviously vary greatly 
in different occupations and in different commu¬ 
nities. An amount equal to ten per cent of cur¬ 
rent wages would go far towards relieving in 
many industries the distress now incident to 
sickness, accident, invalidity, premature death, 


62 


BUSINESS — A PROFESSION 


superannuation and unemployment of the 
wage-earner. But it is certain that the pro¬ 
ceeds of even so large a charge as ten per cent 
of the average daily wage would, under present 
conditions, afford merely alleviation of, and 
not indemnity for, the losses now attendant 
upon those contingencies in the life of the 
workingman. The cost of providing complete 
indemnity would probably reach an amount 
equal to twenty-five per cent of the average 
daily wage. For the premiums requisite to 
secure indemnity from losses incident to sick¬ 
ness, accident, invalidity, premature death or 
superannuation would probably aggregate fif¬ 
teen per cent of the daily wage; while the 
average percentage required to indemnify for 
unemployment due to lack of work would 
probably rise above ten per cent. 

This huge and apparently prohibitive expense 
should not, however, deter us from taking 
action now. It should, on the contrary, incite 
us to immediate and vigorous measures. In¬ 
deed, it has in it elements of great encour¬ 
agement. It will disclose how vast the waste 
incident to present social and industrial condi¬ 
tions is. And when the extent of that waste 
shall have been determined and made clear to 
our people, a long step forward will have been 


THE ROAD TO SOCIAL EFFICIENCY 63 

taken on the road to improvement and re¬ 
sulting social economy. 

Some idea of the possibilities of improve¬ 
ment in this connection are indicated by the 
following data. 

Professor Irving Fisher has compared the 
mortality record of the industrial life insurance 
companies, which provide life insurance to the 
workingmen in amounts of less than $500 on 
the weekly premium plan, with the mortality 
in the ordinary life insurance companies, in 
which the policies average $1,000 or more. 
The figures of deaths per year for each 1,000 
persons insured are these: 


Age. 

Industrial Life 
Insurance Mortality 
(Metropolitan Life 

Ordinary Life 
Insurance Mortality 
(English Experience). 

20 

Experience). 

10.5 

7*3 

25 

14.1 

7.8 

35 

17.2 

9-3 

55 

35 

21.7 


The conditions under which that portion of 
our population live and work who are insured 
in the ordinary life companies are far from 
ideal, and leave open a great opportunity for 
reduction of the death rate. But here we have 
an average death rate among the working¬ 
men at their most productive age — twenty- 
five to thirty-five years — which is nearly 


64 


BUSINESS —A PROFESSION 


twice as great as the death rate among those 
engaged in other occupations. And this high 
death rate of the workingman is that of the 
average insured workingman, not the death 
rate of those engaged in extra-hazardous trades. 

Can there be any doubt that, if this heavier 
mortality had to be adequately compensated 
for by the State or the industries, and the 
insurance cost paid from current earnings, its 
causes would be adequately investigated and 
the evil conditions of living and working which 
produce it would be remedied? Society and 
industry would find how much cheaper it is to 
conserve than to destroy. 

How near at hand the remedy for high mor¬ 
tality lies is illustrated by the experience of 
the model factory village at Bourneville, near 
Birmingham. While the average death rate 
for all ages in England and Wales in the years 
1902 to 1907 was 15.7, the death rate at Bourne¬ 
ville was 6.3; and yet the occupations of the 
inhabitants of Bourneville were fairly repre¬ 
sentative of the whole country. Over fifty 
per cent of the workers were factory hands; 
thirty-six per cent were mechanics, carpen¬ 
ters, bricklayers and others of unclassified 
occupations; and about thirteen per cent 
clerks and travellers. 


THE ROAD TO SOCIAL EFFICIENCY 65 


Professor Fisher concludes also that, on the 
average, every American is sick thirteen days 
in the year. 

Possibilities of lengthening lives and of avoid¬ 
ing sickness and invalidity, like the possibili¬ 
ties of preventing accidents, will be availed of 
when business as well as humanity demands 
that this be done. 

William Hard quoted Edgar T. Davies, the 
Factory Inspector of Illinois, as saying that in 
the year 1906 one hundred men were killed or 
crippled in the factories of Illinois by the set¬ 
screw, and that for thirty-five cents in each in¬ 
stance this danger device could have been 
recast into a safety device. The set-screw 
stands up from the surface of the rapidly re¬ 
volving shaft, and as it turns catches danger¬ 
ously hands and clothes. For thirty-five cents 
the projecting top of the set-screw could be sunk 
flush with the rest of the whirling surface of 
the shaft, and then no sleeve could be entangled 
by it, and no human body could be swung and 
thrown by it. 

The South Metropolitan Gas Company, which 
established, in connection with its system of 
compensation for accidents, a system of inquiry 
into all accidents with a view to their preven¬ 
tion, reduced the number of accidents per 


66 BUSINESS — A PROFESSION 

thousand in seven years from sixty-nine to 
forty. 

John Calder, of Uion, New York, tells of the 
reduction of accidents in an American plant 
from a yearly average of two hundred to 
sixty-four. 

Can there be any doubt that if every acci¬ 
dent had to be carefully investigated and 
adequately compensated for, the number of 
accidents would be reduced to a half or a 
third? 

And undoubtedly the paramount evil in the 
workingman’s life — irregularity of employ¬ 
ment — would yield in large measure to like 
treatment. 

The New York Commission, in its recent 
report on unemployment, gives data from the 
trades unions showing that “ organized workers 
lose, on the average, twenty per cent of their 
possible income through unemployment,” and 
data from the charitable societies showing that 
“from twenty-five to thirty-five per cent of 
those who apply to them for relief every year 
have been brought to their destitute condition 
primarily through lack of work.” 

Some irregularity in employment is doubt¬ 
less inevitable; but in the main irregularity is 
remediable. It has been overcome with great 


THE ROAD TO SOCIAL EFFICIENCY 67 

profit to both employer and employee in im¬ 
portant businesses which have recognized the 
problem as one seriously demanding solution. 
Society and industry need only the necessary 
incentive to secure a great reduction in irregu¬ 
larity of employment. In the scientifically 
managed business irregularity tends to disap¬ 
pear. So far as it is irremediable it should be 
compensated for like the inevitable accident. 

The social and industrial engineers will find 
much of inspiration and encouragement in the 
achievement of their fellow-engineers of the 
factory mutual fire insurance companies of 
New England. 

The huge fire waste in America is a matter 
of common knowledge. The loss in 1910 was 
estimated at $234,000,000; and yet there is 
one class of property, in its nature peculiarly 
subject to fire risks, which was practically 
immune. Some 2,600 factories and their con¬ 
tents, valued together at about $2,220,000,000, 
and scattered throughout twenty-four States 
and the Dominion of Canada, suffered in the 
aggregate fire losses of about one-fortieth of one 
per cent of the value insured. The factories 
so immune were those owned by members of 
the so-called “factory mutuals” of New Eng¬ 
land. The cost to these factories for fire in- 


68 


BUSINESS —A PROFESSION 


surance and fire prevention in the year 1910 
was only forty-three cents for each one thou¬ 
sand dollars of property insurance. Half a 
century before, the cost of insurance to the 
New England factories was $4.30, or ten times 
as great. The record of the “factory mutuals” 
of Rhode Island and of some other States is 
similar. 

Now, how has this reduction of fire insur¬ 
ance cost been accomplished? It was done by 
recognizing that the purpose of these so-called 
fire insurance companies is not to pay losses 
but to prevent fires. These mutual companies 
might more appropriately have been called 
Fire Prevention Companies; for the losses paid 
represent merely instances of failures in their 
main purpose. In these corporations the im¬ 
portant officials are not the financiers but the 
engineers — men who rank among the leaders 
in the engineering profession of America — 
and aiding them is a most efficient corps of 
inspectors. 

The achievement of these factory mutuals — 
the elimination of ninety per cent of the fire 
risks — is the result of sixty years of unre¬ 
mitting effort in ascertaining and removing 
causes of fires, and incidentally educating fac¬ 
tory owners and their employees in the im- 


THE ROAD TO SOCIAL EFFICIENCY 69 


portance of providing against these causes. 
The premiums paid represent the cost of this 
advice, inspection and education as much as the 
cost of what is ordinarily termed “ insurance.” 

The progress of the factory mutuals in re¬ 
ducing fire losses was relatively slow; but it 
has been steady, as is shown in the following 
table of net cost of fire insurance per $1,000 
per year in two representative companies: 



Boston Manufacturers 

Arkwright 

Years. 

Mutual Fire 

Mutual Fire 


Insurance Co. 

Insurance Co. 

1850-60 

$ 4-37 


1861-70 

2.79 

13-37 

1871-80 

2-54 

3.00 

1881-90 

2.27 

2.l6 

1891-1900 

1.44 

1.54 

1901-1910 

0.68 

O.69 

Year 1910 

0.44 

0.43 


Possibilities no less alluring are open to the 
social and industrial engineer. Will the com¬ 
munity support their efforts? 

Consider how great would be the incentive 
to humanize social and industrial conditions 
if the cost of inhuman conditions were not 
only made manifest, but had to be borne from 
day to day unless the inhuman conditions 
themselves were removed! 

Mere description of the misery unnecessarily 
entailed by the inhuman conditions, mere 


70 


BUSINESS —A PROFESSION 


statements of cost, however clear and forceful, 
will fail to secure the removal of these inhuman 
conditions in industry and in the life of our 
people from which this misery springs. But 
if society and industry and the individual were 
made to pay from day to day the actual cost 
of the sickness, accident, invalidity, prema¬ 
ture death or premature old age consequent 
upon excessive hours of labor, of unhygienic 
conditions of work, of unnecessary risks, and 
of irregularity in employment, those evils 
would be rapidly reduced. 

We need a comprehensive system of work¬ 
ingmen’s insurance as an incentive to justice. 
We need it, “lest we forget.” 


OUR NEW PEONAGE: 1 
DISCRETIONARY PENSIONS 


Hale a century ago nearly every American 
boy could look forward to becoming inde¬ 
pendent as a farmer or mechanic, in business or 
in professional life; and nearly every Ameri¬ 
can girl might expect to become the wife of 
such a man. To-day most American boys 
have reason to believe, that throughout life 
they will work in some capacity as employees 
of others, either in private or public business; 
and a large percentage of the women occupy 
like positions. This revolutionary change has 
resulted from the great growth of manufac¬ 
turing and mining as compared with farming; 
from the formation of trusts and other large 
business concerns; from the development of our 
transportation and other public utility corpo¬ 
rations; from the marked increase in gov¬ 
ernmental functions; and, finally, from the 
invasion of women into industry. 

As soon as we awakened to the fact that 
America had become largely a nation of employ- 

1 The substance of a discussion before the Stanley Committee, 
January, 1912; published in “The Independent,” July 25, 1912, 


72 


BUSINESS —A PROFESSION 


ees, the need of a comprehensive provision for 
superannuated wage-earners secured attention. 
Given the status of employee for life, and 
the need of an old age pension 1 is obvious. 
The employee needs the pension because he 
cannot — or at least does not — provide ade¬ 
quately from his wages for the period of super¬ 
annuation. The employers need a comprehen¬ 
sive pension system because, while the presence 
of the superannuated employees in a business 
seriously impairs its efficiency, the dictates 
both of humanity and of policy prevent dis¬ 
charge unless their financial necessities are pro¬ 
vided for. The demand for a pension system 
grows more pressing as businesses grow more 
stable; for in older businesses there is a con¬ 
stant tendency to accumulate superannuated 
employees. The demand becomes particu¬ 
larly acute when businesses grow large as well 
as old; for then it becomes difficult to provide 
for the individual needs of the abnormal 
employee. 

As stated by the Massachusetts Commis¬ 
sion on Old Age Pensions (January, 1910): 

“The problem of dealing with the aged employee 
is an urgent one in the modern business world. The 

1 The term “ pension ” is used throughout in its popular sense as 
including old age annuities. 


DISCRETIONARY PENSIONS 


7 $ 


use of machinery and the stress of industrial employ¬ 
ment have made it increasingly difficult for aged em¬ 
ployees to hold the pace. The universal demand 
nowadays is for young men. Many concerns refuse 
to take on inexperienced men over thirty-five years 
of age. Moreover, men wear out faster under the 
increased strain. What to do with the worn-out work¬ 
ers, — that is the essence of the pension problem. 
To carry them on the pay roll at their regular em¬ 
ployment means waste and disorganization of the 
working force; to turn them adrift is not humane. In 
the past, large employers of labor have tried to meet 
this difficulty in piecemeal fashion, by retiring aged 
employees on pensions in certain cases, or giving them 
light work, each case being provided for separately, 
on its own merits; now they are beginning to deal 
with the problem in a systematic fashion, by adopt¬ 
ing a uniform method of retirement with pension. 

“The motives that have induced large corporate 
employers to provide retirement pensions are partly 
economic and partly humanitarian or philanthropic. 
Economic motives play the leading part. This thing 
has been done because it has been found to be good 
business policy. The economic gain from the pension 
system is twofold; it eliminates the waste and de¬ 
moralization attendant upon the continued employ¬ 
ment of old men who have outlived their usefulness; 
and it helps to promote industry, contentment and 
loyalty on the part of the working force.” 

Economically, the superannuation provision 
may be considered as a depreciation charge. 


74 


BUSINESS—A PROFESSION 


Every prudent manufacturer makes an annual 
charge for the depreciation of his machines, 
recognizing not merely physical depreciation, 
but lessened value through obsolescence. He 
looks forward to the time when the machine, 
though still in existence and in perfect repair, 
will be unprofitable, and hence must be aban¬ 
doned. This annual charge for depreciation 
he treats as a necessary expense of the 
business. 

From the point of view of the workingman 
the expense of providing old age pensions is a 
part of the daily cost of living. He should con¬ 
tribute while able to work to a fund which will 
sustain him when he ceases to earn. From the 
point of view of the employer, the expense of 
providing old age pensions is a part of the 
current expense of his business. He should 
pay as he goes the accruing cost of retiring 
employees who will become superannuated. 
If the wage is insufficient to enable the work¬ 
ingman to provide himself with a pension, it is 
not a living wage. So far as the cost of the old 
age pension is paid by the employer for the 
employees’ benefit, it is in substance a part of 
the wage. So far as such a payment by the 
employer is for insurance against that waste 
and inefficiency in his establishment which 


DISCRETIONARY PENSIONS 


75 


would result from retaining superannuated em¬ 
ployees, and for protection against that dis¬ 
content which would result from discharging 
the superannuated without providing for them 
financially, it is a part of the business expense. 
Since the cost of making old age provision is 
thus either a part of the employees’ daily cost 
of living or of the employer’s daily business 
expense, it should be treated as a current ex¬ 
pense, and may be likened to the premium for 
fire or accident insurance. Whether in the ad¬ 
justment of relations between the employer 
and the employee this current cost of provid¬ 
ing old age pensions should be borne wholly 
by the employer, or wholly by the employee, or 
jointly by both, is an open question; but Eu¬ 
ropean and American experience makes it clear 
that under our present industrial system some 
comprehensive financial provision for the su¬ 
perannuated worker is essential to social if not 
to industrial solvency. To neglect such a re¬ 
quirement is as dangerous as it is for the man¬ 
ufacturer to ignore the depreciation of his 
machines. 

For the protection of the wage-earner it is 
obviously necessary that the right to a pension 
shall not depend upon his being in the employ 
of a particular concern. If his right to an an- 


76 


BUSINESS —A PROFESSION 


nuity is dependent upon his remaining in a 
particular employ he loses all protection when¬ 
ever he ceases to be so employed, whether he 
leaves voluntarily, or is discharged, or in case 
the concern discontinues business by failure or 
for other cause. 

Adequate old age protection, therefore, can¬ 
not be secured to the wage-earner through the 
promise of a pension from a particular con¬ 
cern. He should have old age insurance which 
will protect the wage-earner in whosesoever 
employ he may happen to be when he reaches 
the period of superannuation. For the protec¬ 
tion of the wage-earner it is likewise necessary 
that the pension system should confer an abso¬ 
lute right. No pension system can be satisfac¬ 
tory which makes the granting — or the con¬ 
tinuance of a pension after it has been granted 
— a matter of discretion. 

Germany, France, England and other Euro¬ 
pean countries have undertaken to secure 
through government action old age pensions 
for those who work in private businesses. The 
system adopted in each of these countries differs 
in some respects from that prevailing in each 
of the others; but each system embodies the 
essential requirements referred to above; namely, 
the pension is not dependent upon the workingman 


DISCRETIONARY PENSIONS 


77 


remaining in any particular employ , nor is it de¬ 
pendent upon the discretion of any individuals. 

In America the providing of old age pen¬ 
sions for wage-earners in private businesses is 
left wholly to private initiative. Many large 
concerns — railroads, public utilities, indus¬ 
trial and financial concerns — have established 
their own pension systems. Under substan¬ 
tially all of these systems the wage-earner re¬ 
ceives no protection unless he remains in the 
company’s employ until the age of retirement 
is reached, and even in that event the original 
grant and the continuance of the pension are, 
in large measure, discretionary. 

Thus, the pension plan of the United States 
Steel Corporation, which took effect January 
i, 1911, provides pensions only for those who 
have been in the employ of the company at 
least twenty years, and remain until the time 
for retirement; but no one has the right to re¬ 
main in the employ: 

Article 26. “Neither the creation of this fund nor 
any other action at any time taken by any corporation 
included under the provisions of the fund, or by the 
board of trustees, shall give to any employee the right 
to be retained in the service, and all employees remain 
subject to discharge to the same extent as if this pen¬ 
sion fund had never been created.” 


78 


BUSINESS — A PROFESSION 


Even if the worker has remained in the em¬ 
ploy until the time fixed for retirement, and 
has served faithfully, he has no right to a 
pension: 

Article 24. “The pension plan is a purely volun¬ 
tary provision for the benefit of employees superan¬ 
nuated or totally incapacitated after long and faithful 
service and constitutes no contract and confers no 
legal rights upon any employee.” 

And a board of trustees, in whose selection 
the workers have no voice, and on which they 
have no representation, may refuse to grant 
them a pension or may terminate it after it 
has been granted, for what they in their dis¬ 
cretion deem adequate cause: 

Article 22. “Pensions may be withheld or ter¬ 
minated in case of misconduct on the part of the bene¬ 
ficiaries or for other cause sufficient in the judgment 
of the board of trustees to warrant such action.” 

The pension plan of most other corporations 
embodies similar provisions. Thus, the pen¬ 
sion plan of the International Harvester Com¬ 
pany provides: 

Article 14. “Neither the establishment of this 
system nor the granting of a pension nor any other 
action now or hereafter taken by the pension board 


DISCRETIONARY PENSIONS 


79 


or by the officers of the company shall be held or 
construed as creating a contract or giving to any offi¬ 
cer, agent or employee the right to be retained in the 
service, or any right to any pension allowance, and 
the company expressly reserves unaffected hereby, 
its right to discharge without liability, other than 
for salary or wages due and unpaid, any employee, 
whenever the interests of the company may, in its 
judgment, so require.” 

It has often been said by the corporations 
that one of their purposes in establishing a 
pension system is to “ develop loyalty.” But 
provisions like those quoted above suggest a 
purpose rather to compel than to develop “loy¬ 
alty.” The system is in effect a form of strike 
insurance . The pension is made dependent 
upon continuity of employment for a fixed 
period. The worker cannot receive a pension 
unless he remains in the company’s employ 
until the date for retirement, and he has no 
right to remain in its employ, since the com¬ 
pany reserves the full power to discharge him 
at any time, with or without cause. After a 
wage-earner has served a number of years 
and feels himself growing older, the prospect 
of a pension becomes a potent influence. He 
realizes that if he abandons his position or is 
discharged, he loses not only immediate em¬ 
ployment, but protection for old age. He re- 


80 


BUSINESS — A PROFESSION 


alizes also that the chance of securing other 
employment is greatly diminished by reason of 
his advancing years; diminished not because 
he is already old and less efficient, but because 
he will become superannuated sooner than a 
younger man, so that his employment by an¬ 
other concern will impose upon it or its pension 
system a superannuation burden sooner than if 
a younger man were selected. 

Features in a pension system like those 
quoted above tend to make the wage-earner 
compliant. He can be more readily relied upon 
to prove “loyal” and not to “go out” even if 
others strike for higher wages and better work¬ 
ing conditions. The “continuous employment 
feature” of the pension system tends thus to 
rivet the wage-earner to his employer, and the 
provision by which the allowance of a pension 
is made discretionary further insures “loyalty” 
of the wage-earner during his employment. 
An employee of the United States Steel Corpora¬ 
tion advancing in years might well be deterred 
from hazarding the prospect of a pension by 
trade-union activity, or even by joining a 
union. 

The tendency of such provisions in a pension 
system to destroy industrial liberty is the 
more potent because the system is being 


DISCRETIONARY PENSIONS 


81 


adopted quite generally by those trusts and 
other powerful corporations which are deter¬ 
mined to eliminate trade-unionism. Indeed, 
in many cases the pension system was intro¬ 
duced as an aid to carrying out that labor 
policy. Individual employees, working under 
conditions which preclude collective bargain¬ 
ing, obviously lack industrial liberty so long as 
they are so employed; for they have no part in 
determining the conditions under which they 
work. After entering such employment, the 
only remnant of liberty remaining to them is 
the liberty of leaving it; and the features of the 
pension system just referred to undermine that 
remnant of liberty. 

A pension system with such features must 
either prove a delusive protection or operate 
as a bribe to induce the wage-earner to submit 
to a new form of subjection to the corporation. 
A frank employer recently said: “By provid¬ 
ing so liberal a pension we have bought from 
the employee the right to leave us.” Such a 
use of the pension is obviously illegitimate. 
The legitimate need of the employer for a pen¬ 
sion system is satisfied if the provisions protect 
him from the necessity of keeping superannu¬ 
ated employees on the pay roll. This need of 
the employer is equally satisfied whether the 


82 


BUSINESS— A PROFESSION 


employee retires on a pension or leaves the 
employ before the age of retirement. In other 
words, what the employer should seek to ac¬ 
complish by the pension is merely to protect 
his business from the incubus of superannuated 
employees; and this purpose is accomplished 
as to each employee if he leaves the employ be¬ 
fore he becomes superannuated. If the work¬ 
ingman so leaves, he should in some form carry 
with him the accrued right to a pension — the 
proportionate value of the time service — 
which would ripen into a pension if the work¬ 
ingman or his new employer paid the premiums 
of later years. Under these private pension sys¬ 
tems that part of the pension earned by years 
of service is wholly lost when he leaves the 
company’s employ, whatever the cause. 

Employers seek to justify provisions in the 
pension systems like those quoted above by 
the fact that the pension fund is contributed 
wholly by the employer. But this fact furnishes 
no justification. The employer should not be 
permitted, even at his own expense, to establish 
a pension system which tends to rob the work¬ 
ingman of his little remaining industrial lib¬ 
erty. A practice bearing such fruits is clearly 
against public policy. Many of our States 
have, in aid of industrial liberty, prohibited 


DISCRETIONARY PENSIONS 


83 


the employers from making it a condition of 
employment that their employees should agree 
not to join a labor union. It may become nec¬ 
essary to apply a similar prohibition against 
features in private pension schemes which have 
a tendency to unduly abridge the liberty of the 
individual workingman. 

The Massachusetts savings insurance banks, 
and several of the life insurance companies, 
afford employers facilities for establishing pen¬ 
sion systems which are free from the objections 
discussed above. From such insurance concerns 
there can be purchased for each employee an 
old age annuity which (subject to due pre¬ 
mium payments) confers upon the holder an 
absolute right to the annuity, and which is 
equally effective in whosesoever employ the 
annuitant is, or if he be without an employer. 

The premiums on such an annuity policy could 
be made payable at frequent intervals, say 
monthly, so that if payable by the employee 
they would not be too large to be borne, and if 
payable by the employer, they may be figured 
as a part of the current wage or expense. The 
policy should preferably be taken out while the 
wage-earner is young, so that the current pre¬ 
mium may be small; for the annual cost of old 
age insurance, like that of life insurance, be- 


84 


BUSINESS —A PROFESSION 


comes almost prohibitive when the policy is 
not taken out until the insured is advanced in 
years. If the policy is not taken out until the 
wage-earner grows old, the premium will be so 
large that, if payable by the wage-earner, it 
could not be borne, and if payable by the em¬ 
ployer, might discourage the annuitant’s being 
employed. Under the Massachusetts system a 
separate annuity policy is issued for each em¬ 
ployee, so that the employee can take the policy 
with him when he leaves a concern. The em¬ 
ployee can then pay the premiums himself until 
another employer is found who is willing to 
assume the charge as a part of his own sys¬ 
tem of providing against superannuation. The 
workingman possessing such an annuity policy 
taken out when young should meet with no 
difficulty in securing employment solely on 
account of advancing years; for the burden 
on the new employer of providing against his 
superannuation would be no greater than in the 
case of a younger employee. 

Every pension system should be contribu¬ 
tory and co-operative; that is, the cost should 
be borne partly by the employer and partly by 
the employee, and preferably in equal shares. 
The management of the pension system should 
likewise be shared in by both employer and 


DISCRETIONARY PENSIONS 


85 


employee. The system should also be obliga¬ 
tory; that is, when a system has been estab¬ 
lished, all employees should, so far as possible, 
become subject to its provisions; and both 
employer and employee should be bound to 
continue the system once established. For the 
present, however, it should be optional with 
the employer and his employees to establish a 
pension system. 

The Boston and Maine Pension Act, 1 passed 
by the Massachusetts Legislature in 1909, con¬ 
tains suggestions for such an elective obliga¬ 
tory co-operative system. That act provides, 
among other things: 

First. A pension system is established only 
in case the company by a majority vote of its 
directors and a two-thirds vote of the employees 
voting thereon decide so to do. When adopted 
by such votes the system becomes operative 
with the force of law upon all persons then or 
thereafter employed, except such as voted 
against establishing the system, and also within 
three months thereafter filed their written 
objections thereto. 

1 The act, which embodies the results of long negotiations be¬ 
tween the company and the employees, was enacted May 29, 1909. 
On June 18, 1909, the Legislature of Massachusetts authorized the 
New York, New Haven and Hartford Railroad Company to acquire 
control of the Boston and Maine system. The New Haven manage¬ 
ment being opposed to the establishment of the pension plan, the 
Boston and Maine pension system has not yet become operative. 


86 BUSINESS — A PROFESSION 

Second. The pension fund is supplied by 
monthly contributions from employer and em¬ 
ployees in equal shares, the employees’ share 
being deducted from wages and transmitted by 
the company to the pension fund. 

Third. The management of the pension sys¬ 
tem is vested in a board of seven trustees, three 
of whom are selected by the company, three by 
the employees (who are formed into a pension 
association), and the seventh by the six so 
chosen. 

Fourth. The amount of contributions to the 
pension fund is fixed as a percentage of wages. 
What percentage shall be assessed is determined 
by the trustees (subject to the approval of the 
directors of the company) up to an amount 
equal to three per cent of the wages, and can be 
fixed at a higher amount if approved by the 
directors and the pension association. 

Fifth. Any one who remains in the employ of 
the company up to the time of retirement has 
an absolute right to a pension. Any person 
who ceases to be an employee prior to the time 
fixed for retirement retains the right to a part 
only of the accrued pension; that is, a person 
who leaves the employ voluntarily, or who is 
discharged, receives not the full accrued value 
of the pension at the time of so leaving, but 


DISCRETIONARY PENSIONS 


87 


only an amount equal to his own contribu¬ 
tions. The act embodies in this respect a very 
objectionable feature, which was reluctantly 
assented to by the committee of the employees, 
as necessary to secure the consent of the com¬ 
pany to the support of the bill, and in the 
hope that a more just provision might be later 
substituted. 

It is upon these general lines, consistent with 
individual liberty and industrial democracy, 
that the American pension systems should be 
developed. 


THE INCORPORATION OF TRADES 
UNIONS 1 


Lest what I say on the advisability of in¬ 
corporating trade unions be misunderstood, it 
seems wise to state at the outset my views of 
their value to the community. 

They have been largely instrumental in 
securing reasonable hours of labor and proper 
conditions of work; in raising materially the 
scale of wages, and in protecting women and 
children from industrial oppression. 

The trade unions have done this, not for 
the workingmen alone, but for all of us; since 
the conditions under which so large a part of 
our fellow citizens work and live will deter¬ 
mine, in great measure, the future of our 
country for good or for evil. 

This improvement in the condition of the 
workingmen has been almost a net profit to 
the community. Here and there individuals 
have been sacrificed to the movement; but the 
instances have been comparatively few, and 

1 An address delivered at a meeting of the Economic Club of 
Boston, December 4, 1902, and published in the “Green Bag,” 
January, 1903. 


INCORPORATION OF TRADES UNIONS 89 


the gain to the employees has not been at¬ 
tended by a corresponding loss to the em¬ 
ployer. In many instances, the employer’s 
interests have been directly advanced as an 
incident to improving the conditions of labor; 
and perhaps in no respect more than in that 
expressed by a very wise and able railroad 
president in a neighboring State, who said: 
“I need the labor union to protect me from 
my own arbitrariness.” 

It is true that the struggle to attain these 
great ends has often been attended by intoler¬ 
able acts of violence, intimidation and op¬ 
pression; but the spirit which underlies the 
labor movement has been essentially noble. 
The spirit which subordinates the interests 
of the individual to that of the class is the 
spirit of brotherhood — a near approach to 
altruism; it reaches pure altruism when it 
involves a sacrifice of present interests for the 
welfare of others in the distant future. 

Modern civilization affords no instance of 
enlightened self-sacrifice on so large a scale 
as that presented when great bodies of men 
calmly and voluntarily give up steady work, 
at satisfactory wages and under proper con¬ 
ditions, for the sole reason that the employer 
refuses the recognition of their union, which 


90 


BUSINESS — A PROFESSION 


they believe to be essential to the ultimate 
good of the workingmen. If you search for 
the heroes of peace, you will find many of 
them among those obscure and humble work¬ 
men who have braved idleness and poverty 
in devotion to the principle for which their 
union stands. 

And because the trade unions have ac¬ 
complished much, and because their funda¬ 
mental principle is noble, it is our duty, where 
the unions misconduct themselves, not to 
attack the unions, not — ostrich-like — to re¬ 
fuse to recognize them, but to attack the 
abuses to which the unions, in common with 
other human institutions, are subject, and 
with which they are afflicted; to remember 
that a bad act is no worse, as it is no better, 
because it has been done by a labor union and 
not by a partnership or a business corporation. 
If unions are lawless, restrain and punish 
their lawlessness; if they are arbitrary, re¬ 
press their arbitrariness; if their demands are 
unreasonable or unjust, resist them; but do 
not oppose the unions as such. 

Now, the best friends of labor unions must 
and should admit that their action is fre¬ 
quently hasty and ill-considered, the result of 
emotion rather than of reason; that their 


INCORPORATION OF TRADES UNIONS 91 


action is frequently arbitrary, the natural re¬ 
sult of the possession of great power by per¬ 
sons not accustomed to its use; and that the 
unions frequently ignore laws which seem to 
hamper them in their efforts, and which they 
therefore regard as unjust. For these defects, 
being but human, no complete remedy can be 
found; but the incorporation of labor unions 
would, among other things, tend in some mea¬ 
sure to correct them. 

The general experience in this country, in 
respect at least to the great strikes, has 
been that success or failure depended mainly 
upon whether public opinion was with or 
against the strikers. Nearly every American 
who is not prejudiced by his own peculiar in¬ 
terests recognizes the value of labor unions. 
Nearly every American who is not himself 
financially interested in a particular contro¬ 
versy sympathizes thoroughly with every strug¬ 
gle of the workingmen to better their own 
condition. But this sympathy for the working¬ 
men is quickly forfeited whenever the conduct 
of the strikers is unreasonable, arbitrary, lawless 
or unjust. The American people with their 
common sense, their desire for fair play and 
their respect for law, resent such conduct. 
The growth and success of labor unions, 


92 


BUSINESS — A PROFESSION 


therefore, as well as their usefulness to the 
community at large, would be much advanced 
by any measures which tend to make them 
more deliberate, less arbitrary, and more pa¬ 
tient with the trammels of a civilized com¬ 
munity. They need, like the wise railroad 
president to whom I referred, something to 
protect them from their own arbitrariness. 
The employer and the community also require 
this protection. Incorporation would in some 
measure help to this end. 

When, in the course of a strike, illegal acts 
are committed, such as acts of violence or of 
undue oppression, the individual committing 
the wrong is, of course, legally liable. If the 
act is a crime, the perpetrator may be arrested 
and punished; if it is a mere trespass, he may be 
made to pay damages, provided he is financially 
responsible; and if money damages appear not 
to be an adequate remedy, an injunction 
against the wrongful acts may be granted by 
a court of equity. If the injunction is diso¬ 
beyed, the defendant may be imprisoned for 
contempt. 

Now, it seems to be a common belief in this 
country that while the individual may be thus 
proceeded against in any of these ways, the 
labor union, as such, being unincorporated, 


INCORPORATION OF TRADES UNIONS 93 


that is, being a mere voluntary association, can¬ 
not be made legally responsible for its acts. 
The rules of law established by the courts 
of this country afford, it is true, no justifica¬ 
tion for this opinion. A union, although a 
voluntary unincorporated association, is legally 
responsible for its acts in much the same way 
that an individual, a partnership or a cor¬ 
poration is responsible. If a union, through 
its constituted agents, commits a wrong, or is 
guilty of violence or of illegal oppression, the 
union, and not merely the individuals who are 
the direct instruments of the wrong, can be 
enjoined or made liable for damages to the same 
extent that the union could be if it were in¬ 
corporated; and the funds belonging to the 
unincorporated union can be reached to satisfy 
any damages which might be recovered for the 
wrong done. The Taff Vale Railway case, 
decided last year in England, in which it was 
held that the Amalgamated Society of Railway 
Servants could, as a union, be enjoined and be 
made liable in damages for wrongs perpetrated 
in the course of a strike, created consternation 
among labor unions there, but it laid down no 
principle of law new to this country. 

Numerous instances may be found in our 
courts where labor unions have been enjoined, 


94 


BUSINESS —A PROFESSION 


and in our own State, more than thirty years 
ago, an action was maintained against a union 
for w T rongfully extorting from an employer a 
penalty for having used the product of “scab” 
labor. But while the rules of legal liability 
apply fully to the unions, though unincorpo¬ 
rated, it is, as a practical matter, more difficult 
for the plaintiff to conduct the litigation, and 
it is particularly difficult to reach the funds 
of the union with which to satisfy any judg¬ 
ment that may be recovered. There has con¬ 
sequently arisen, not a legal, but a practical 
immunity of the unions, as such, for most 
wrongs committed. 

This practical immunity of the unions from 
legal liability is deemed by many labor leaders 
a great advantage. To me it appears to be 
just the reverse. It tends to make officers and 
members reckless and lawless, and thereby to 
alienate public sympathy and bring failure upon 
their efforts. It creates on the part of the em¬ 
ployers, also, a bitter antagonism, not so much 
on account of lawless acts as from a deep- 
rooted sense of injustice, arising from the feeling 
that while the employer is subject to law, the 
union holds a position of legal irresponsibility. 

This practical immunity of the labor unions 
from suit or legal liability is probably largely 


Ps CORPORATION OF TRADES UNIONS 95 


responsible for the existence of the greatest 
grievances which labor unions consider they 
have suffered at the hands of the courts; 
that is, the so-called “ government by injunc¬ 
tion.’ J It has come about in this way: An 
act believed to be illegal is committed during 
a strike. If that act is a crime, a man 
may be arrested, but in no case can he be con¬ 
victed of a crime except on proof beyond a 
reasonable doubt and a verdict of the jury, 
and on every jury there is apt to be some one 
favorable to the defendant. Many acts, how¬ 
ever, may be illegal which are not criminal, and 
for these the only remedy at law is a civil action 
for damages; but as the defendant is usually 
financially irresponsible, such action would 
afford no remedy. 

The courts, therefore, finding acts com¬ 
mitted or threatened, for which the guilty 
parties cannot be punished as for a crime, 
and cannot be made to pay damages by way 
of compensation, have been induced to apply 
freely, perhaps too freely, the writ of injunc¬ 
tion. They have granted, in many instances, 
this writ according to the practices of the 
court of equity upon preliminary application, 
wholly ex parte , and upon affidavits, without 
any chance of cross-examination. If the courts 


96 


BUSINESS —A PROFESSION 


had been dealing with a responsible union 
instead of with irresponsible defendants, they 
would, doubtless in many of the cases, have 
refused to interfere by injunction and have 
resolved any doubts in favor of the defendants 
instead of the plaintiffs. 

In another respect, also, this practical im¬ 
munity of the unions has been very dearly 
bought: Nearly every large strike is attended 
by acts of flagrant lawlessness. The employers, 
and a large part of the public, charge these acts 
to the unions. In very many instances the 
unions are entirely innocent. Hoodlums, or 
habitual criminals, have merely availed them¬ 
selves of a convenient opportunity for breaking 
the law, in some instances even incited thereto 
by employers desiring to turn public opinion 
against the strikers. What an immense gain 
would come to the unions from a full and fair 
trial of such charges if the innocence of the 
unions were established, and perhaps even the 
guilt of an employer! And such a trial would 
almost necessarily be had before a jury, upon 
oral testimony, with full opportunity of cross- 
examination; whereas now, nearly every im¬ 
portant adjudication involving the alleged 
action of unions is made upon application 
to a judge sitting alone, and upon written 


INCORPORATION OF TRADES UNIONS 97 

affidavits, without the opportunity of cross- 
examination. 

It has been objected by some of the labor 
leaders that incorporation of the unions would 
expose to loss the funds which have been 
collected as insurance against sickness, accident 
and enforced idleness; that these funds might 
be reached to satisfy claims made for wrongs 
alleged to have been committed by the union. 
I can conceive of no expenditure of money by 
a union which could bring so large a return as 
the payment of compensation for some wrong 
actually committed by it. Any such payment 
would go far in curbing the officers and mem¬ 
bers of the union from future transgression of 
the law, and it would, above all, establish the 
position of the union as a responsible agent 
in the community, ready to abide by the law. 
This would be of immense advantage to the 
union in all its operations. 

Again, it has been urged that the incor¬ 
poration of the union would lead to a multi¬ 
plication of lawsuits, which would involve 
the union in great expense; but the expense 
of conducting such litigation would be insignifi¬ 
cant as compared with the benefits which would 
result to the union from holding a recognized 
and responsible position in the community. 


98 


BUSINESS —A PROFESSION 


Again, it has been urged that the unions 
would not fear litigation if justice were promptly 
administered; but that it was the dragging out 
of litigation which was to be apprehended. 
I take it that, so far as the unions have suf¬ 
fered from the administration of the law, it 
has not been from delays but from precipi¬ 
tancy. They have suffered at times in the 
granting of preliminary injunctions, injunc¬ 
tions which have been more readily granted 
because of the irresponsible position of the 
defendants. 

Again, it has been urged that the unions 
might be willing to submit themselves readily 
to suit if the rules of law, as now adminis¬ 
tered by the courts, were not unjust to labor. 
I am inclined to think that there have been 
rendered in this country many decisions which 
do unduly restrict the activity of the unions. 
But the way to correct the evil of an unjust 
decision is not to evade the law but to amend 
it. The unions should take the position squarely 
that they are amenable to law, prepared to take 
the consequences if they transgress, and thus 
show that they are in full sympathy with the 
spirit of our people, whose political system 
rests upon the proposition that this is a gov¬ 
ernment of law, and not of men. 


HOW BOSTON SOLVED THE GAS 
PROBLEM 1 


Shall the public utilities be owned by the 
public? — is a question pressing for decision 
in nearly every American city. 

To aid in its proper solution the National 
Civic Federation began about two years ago 
a comprehensive investigation of representa¬ 
tive American and British gas, water, electric 
light and street railway plants, with a view to 
comparing the advantages and disadvantages 
of private and public ownership. The opinions 
of the experts upon the data so collected ap¬ 
pear to be widely divergent and to indicate, so 
far as they can be reconciled at all, that neither 
private nor public ownership, as ordinarily 
practiced, is wholly satisfactory. 

While this investigation was proceeding, 
Massachusetts entered, in connection with the 
Boston gas supply, upon an experiment, new in 
America, which may lead to the best practical 
solution of the public-utilities problem. The 
new Boston system creates substantially a 

1 Published in “American Review of Reviews,” November, 1907. 


100 


BUSINESS —A PROFESSION 


partnership between the public and the stock¬ 
holders of the gas company — a partnership in 
which the public will secure an ever-increasing 
share of the profits of the business. 

This system has already given to Boston 
eighty-cent gas, although Boston is located many 
hundred miles from the mines which supply its 
coal. Eighty cents is a lower price for gas than 
is actually enjoyed by any other city in the 
United States, except a few within the coal 
and oil region, like Cleveland or Wheeling, and 
Redlands and Santa Ana, Cal. Even in those 
cities the price is not lower than seventy-five 
cents — a price which Boston may reasonably 
expect to attain soon. For, during the two years 
ending July i, 1907, four reductions in price each 
of five cents have been made. To have reduced 
the price of gas twenty per cent during that 
period of generally rising prices in labor and^ 
materials is certainly a notable achievemept. 
The most recent reductions in price were the 
wholly voluntary acts of the company, made 
under wise laws framed in the interest both of 
the public and of the stockholders. The saving 
to the gas consumer by these reductions was in 
the first year $265,404.55, in the second year 
$565,725.60, and will be in the third (the cur¬ 
rent) year about $800,000. 


BOSTON AND THE GAS PROBLEM 101 


That this saving to the consumer was not at¬ 
tained by a sacrifice of the interests of the 
stockholder may be inferred from the market 
price of the stock of the association which con¬ 
trols the gas company. In the two years fol¬ 
lowing the legislation of 1905, a period in which 
most other stocks depreciated largely, the 
common stock of the Massachusetts Gas Com¬ 
panies rose from 44^ to 57^2; and even in 
the severe stock depression of September, 1907, 
this stock was firm at 52. 

Compare with the results of the Boston ex¬ 
periment the attempt in New York City made 
at about the same time to reduce the price of gas 
from one dollar to eighty cents by legislative fiat 
and the compulsory orders of the State com¬ 
mission. The New York company contended 
that the law was unconstitutional; the federal 
court issued an injunction; the consumer still 
pays out one dollar for each one thousand feet 
of gas; and the market price of the stock of 
the Consolidated Gas Company of New York 
fell during the same period of two years from 200 
to 118, and in September, 1907, to 96 %. 

But Boston has reaped from the sliding-scale 
system as applied under President Richards’ 
administration of the company far more than 
cheaper gas and higher security values. It has 


102 


BUSINESS — A PROFESSION 


been proved that a public-service corporation 
may be managed with political honesty, and 
yet successfully, and that its head may become 
a valuable public servant. The officers and 
employees of the gas company now devote them¬ 
selves strictly to the business of making and dis¬ 
tributing gas, instead of dissipating their abili¬ 
ties, as heretofore, in lobbying and political 
intrigue. As a result, gas properties which 
throughout the greater part of twenty years 
had been the subject of financial and political 
scandals, developing ultimately bitter hostility 
on the part of the people, are now conducted 
in a manner so honorable as to deserve and to 
secure the highest public commendation. 

The passage of the Sliding Scale Act of 1906 
marked the close of the campaign upon which 
the Public Franchise League entered in 1903. 
All Massachusetts gas companies had since 
1885 been subject to the supervision of a State 
commission with very broad powers, including 
that of fixing prices. New securities could be 
issued only with the commission’s approval. 
For many years stringent laws prohibiting 
stock-watering had been in force. While these 
laws are of great value and have protected 
Massachusetts from many of the evils of cor¬ 
porate management from which other States 


BOSTON AND THE GAS PROBLEM 103 


have suffered, dissatisfaction with conditions 
from time to time prevailing in connection with 
the Boston gas supply was persistent and well 
founded. Boston tried successively “regulated ” 
monopoly, competition and the combination of 
gas companies. The service was poor and the 
management unprogressive. The price of gas, 
which after a strenuous contest had been re¬ 
duced in parts of Boston to one dollar in 1893, 
appeared to be immutable. 

The application to the legislature made in 
1903 for leave to consolidate the several Boston 
companies then in combination afforded the 
Public Franchise League its opportunity. Sev¬ 
eral minor provisions were inserted in the 
consolidation act designed to protect the people’s 
rights, and the issue of capital by the united 
company was limited to the net “fair value of 
the plants and property of the several corpora¬ 
tions as the same shall be determined” by the 
gas and electric light commissioners, “with¬ 
out enhancement on account of the value of 
franchises or earning capacity or on account of 
exclusive privileges derived from rights in the 
public streets.” 

The aggregate outstanding securities of the 
constituent companies had a par value of only 
$15,124,121 (of which $9,309,600 was stock and 


104 


BUSINESS — A PROFESSION 


$5,814,521 funded debt). But when, in 1904, 
application was made under the act to fix the 
capital, the companies claimed that the prop¬ 
erties had recently cost the then owners over 
$24,000,000, that their replacement value was 
about the same amount, and that the fair value 
for capitalization should be not less than $20,- 
609,989.99. The Public Franchise League, on 
the other hand, contended that substantially 
any excess in value over the $15,124,121 rep¬ 
resented not contributions by stockholders, but 
accumulations from excessive payments exacted 
from gas consumers; that in the reorganization 
of the business such value should not be capi¬ 
talized; and that the Consolidated Company’s 
capital stock should therefore be limited to the 
aggregate of the capital of the constituent com¬ 
panies then outstanding, plus such additional 
amount of stock as it might be necessary to issue 
at its estimated market value (which was above 
the par value) to provide funds for paying off 
all existing indebtedness. The league deemed 
the retention of the original capital so aug¬ 
mented of fundamental importance, mainly be¬ 
cause the payment of a high rate of dividend 
on a small capital issue would tend to keep the 
public vigilant. 

After a long and bitter struggle the gas com- 


BOSTON AND THE GAS PROBLEM 105 


panies, acting under the enlightened and able 
leadership of Mr. Richards, agreed, in 1905, 
with the Public Franchise League upon legis¬ 
lation which provided that the capital of the 
consolidated company should be limited to the 
aggregate par value of the outstanding stock 
and funded indebtedness of the constituent 
companies, to wit: $15,124,000; that the maxi¬ 
mum price of gas in Boston should be reduced 
to ninety cents within twelve months after 
the consolidation was effected; and that the 
governor should appoint a commission to con¬ 
sider and report to the next legislature whether 
the adoption in Boston of the so-called London 
sliding scale system for “the automatic and 
interdependent adjustment of the price of gas to 
consumers and the rate of dividends to stock¬ 
holders of gas companies’’ was expedient. The 
favorable recommendation of the minority of 
this commission, Messrs. James E. Cotter and 
Charles P. Hall, was supported by the Public 
Franchise League and the gas company, and on 
May 26, 1906, the Sliding Scale Act received 
Governor Guild’s approval in spite of the 
strenuous opposition of both conservatives and 
radicals. 

The Boston Sliding Scale Act, which embodies 
with some modifications the main provisions 


106 


BUSINESS —A PROFESSION 


of the system widely used in England, provides 
as follows: 

First. Ninety cents per thousand feet of gas 
(that is, the maximum price then actually 
charged by the Boston company) is made the 
“standard price” of gas. 

Second. Seven per cent (that is, one per cent 
less than the dividend which was then being 
paid by the Boston company) is made the 
“standard dividend.” 

Third. The company is prohibited from pay¬ 
ing more than seven per cent dividend unless 
and until one year after it shall have reduced 
the price of gas below ninety cents, and then 
may increase its dividend at the rate of one 
per cent for every five cents reduction in the 
price of gas. 

Fourth. New stock can be issued only with 
the consent of the Gas and Electric Light 
Commissioners, and must be sold at auction 
at such minimum price and under such other 
conditions as the Commissioners prescribe. 

Fifth. Provision is made for determining 
annually, and publishing in detail in the news¬ 
papers, the cost of manufacturing and distribut¬ 
ing gas. 

Sixth. After the expiration of ten years, the 
Gas and Electric Light Commissioners may, 


BOSTON AND THE GAS PROBLEM 107 


upon petition, “ lower or raise the standard price 
per thousand feet to such extent as may justly 
be required by reason of greater or less burden 
which may be imposed upon the company by 
reason of improved methods in the art of manu¬ 
facture, by reason of changes in prices of mate¬ 
rials and labor, or by reason of changes in other 
conditions affecting the general cost of manu¬ 
facture or distribution of gas.” 

A seven per cent dividend upon the capital of 
the consolidated company was equivalent to a 
return of about 4.35 per cent on the replace¬ 
ment value of the gas properties as testified 
to, and of their cost to the then owners. The 
“standard dividend,” therefore, though nomi¬ 
nally seven per cent, represented but a modest 
return upon the capital then recently invested, 
and was about $150,000 less than the aggre¬ 
gate amount then being paid by the several 
companies as return upon capital. Neverthe¬ 
less strenuous opposition was made to the 
Sliding Scale bill on the ground that successive 
reductions in price would enable the gas com¬ 
pany to pay very large dividends. The Public 
Franchise League recognized fully that after a 
few years’ operation under the act much larger 
dividends would probably be paid than capital 
as capital is entitled to when employed in a 


108 


BUSINESS —A PROFESSION 


business which is not only safe because it enjoys 
a substantial monopoly, but which also receives 
from the community without the payment of 
any compensation the license to lay and main¬ 
tain its pipes in the public streets. The League 
insisted, however, that the proper aim of the 
public must be not to limit dividends, but to 
secure gas of good quality at low prices; that 
a limitation of dividends was desirable only 
when it conduced to that end; and that under 
proper conditions a reasonable assurance of the 
undisturbed enjoyment of large dividends might 
be the best method of attaining cheap gas. 

The League therefore urged that the possi¬ 
bility of a large return upon capital offered 
under the sliding scale system should be re¬ 
garded merely as an incentive to securing for 
the gas business the kind of management most 
likely to produce and distribute gas at the 
lowest possible cost, and thus supply an essen¬ 
tial prerequisite to cheap gas. Protection 
against corporate abuses demands for gas 
companies strict supervision and publicity. 
Fairness demands that proper compensation 
be made in some form for the use of our streets. 
But no self-sustaining system of supplying 
gas can give to the people cheap gas unless it 
rests upon high efficiency in management. 


BOSTON AND THE GAS PROBLEM 109 


The gas business has many of the charac¬ 
teristics of both manufacturing and merchan¬ 
dizing. Like other manufacturing businesses, 
it produces an article for sale. The cost of its 
produce is dependent largely upon the char¬ 
acter and condition of the plant; upon the 
extent to which labor and waste-saving devices 
are adopted; upon the skill with which raw ma¬ 
terials and supplies are purchased and waste or 
residual products are disposed of; and whether 
the plant is operated to its full capacity. 

To an even greater extent than in most mer¬ 
cantile businesses, the pro rata cost of distri¬ 
bution of gas is dependent upon large volume. 
The distributing plant requires an exceptionally 
large investment. But the mains or pipes are 
rarely used to their full capacity. The interest, 
depreciation and maintenance charges are the 
same whatever the volume of sales. The in¬ 
spection of meter, and many other charges, in¬ 
crease but slightly with the increase of sales. 
The pro rata cost of distributing gas dimin¬ 
ishes largely, therefore, with the increase in the 
quantity sold. But, as in most mercantile 
businesses, the quantity of gas which can be sold 
in any of our large cities is dependent mainly 
upon the skill, energy, initiative and intelli¬ 
gence with which the business is conducted. 


110 


BUSINESS —A PROFESSION 


The demand for gas is not a fixed quantity. 
There is, undoubtedly, a minimum quantity 
which will be used under almost any conceivable 
circumstances. But limits can scarcely be set 
to the possible increase of its use in our large 
cities. Not only is there an ever-growing de¬ 
mand for intense artificial lighting of public 
places, stores and residences, but there is an 
almost limitless field now occupied by electric 
light, coal and oil, of which gas is the natural 
competitor. The limits of the use of gas in any 
city, therefore, will be set mainly by the skill, 
energy and initiative of those who manage the 
business and by the extent to which they ap¬ 
preciate the fact that increased use of gas will 
result from reduction in price, bettering of ap¬ 
pliances and improving facilities. 

A management possessing the requisite ability 
and skill for such a business and which would 
exercise the requisite vigilance and energy 
may be best secured by following those lines 
upon which the remarkable industrial advance of 
America has proceeded, the lines of intelligent 
self-interest. Those who manage our gas com¬ 
panies and other public-service corporations 
should be permitted, subject to the limitations 
stated above, to conduct the enterprise under 
the conditions which in ordinary business 


BOSTON AND THE GAS PROBLEM 111 


have proved a sufficient incentive to attract 
men of large ability, and to insure from them 
their utmost efforts for its advancement. These 
essential conditions are: 

(a) The right to enjoy a fair share of the 
fruits of successful effort. 

(b) The opportunity of devoting one’s whole 
efforts to developing the business. 

(c) The probability of pursuing for a reason¬ 
able time without interruption such business 
policy as may be adopted. 

The Public Franchise League believed that 
the sliding scale system supplies in large meas¬ 
ure these conditions essential to the success¬ 
ful conduct of our public services — condi¬ 
tions which are in no respect inconsistent 
with the restrictions demanded for a proper 
protection of the public interests. It believed 
also that the Boston company possessed in its 
president, Mr. Richards, a man of the character 
and ability required to make the sliding scale 
system a pronounced success. The results of 
the new law under his administration have 
happily confirmed the judgment of the League. 

The rate of increase in savings to the gas 
consumer noted above — that is, from $265,- 
404.55 in the first year to $800,000 (estimated) 
for the third year — is due in large measure to 


112 BUSINESS —A PROFESSION 

the rapid successive reductions in the price of 
gas; and, obviously, further reductions will 
come more slowly. But further reductions may 
be expected, both because of the growing effi¬ 
ciency of the management, and the rapidly 
increasing consumption of gas. 

The efficiency of the management is being 
promoted largely through the voluntary ex¬ 
tension by the company of the sliding scale 
principle to its employees. Under this wise 
provision 681 employees receive, in addition 
to regular wages, a dividend on their wages, at 
the same rate as the dividend on capital stock 
paid to stockholders. And these 681 em¬ 
ployees have either already become stock¬ 
holders, or under the operation of the system 
will soon be such. 

Even without further reductions in price, 
some increase in the saving to the people 
may be expected each year. For it is one of 
the great merits of the sliding scale system 
that while, upon reduction in price, the in¬ 
creased dividend is figured from year to year 
upon the same or substantially the same capi¬ 
tal, the saving in price is practically certain 
to be figured upon an ever-increasing quantity 
sold. The reduction in price increases sales; 
and the increase of sales renders further re- 


BOSTON AND THE GAS PROBLEM 113 


ductions in price possible. The sales of the 
Boston company to consumers in the year end¬ 
ing June 30, 1907, were 23.73 per cent greater 
than in the year ending June 30, 1905 — the 
first reduction in price having been made as of 
July 1, 1905. The sales from July 1, 1907 (when 
the price was reduced to eighty cents), to October 
1, 1907, were 16.6 per cent greater than that of 
the corresponding period of the preceding year. 
It is expected that the company will this year 
increase its dividend rate one per cent, calling 
for an additional payment to stockholders of 
$151,240; but the people will save in the cur¬ 
rent year (as compared with the standard price 
of ninety-cent gas) about $400,000. When the 
eighty-cent rate shall have been in force twelve 
months the company may increase its dividends, 
if earned, by another one per cent. But it cannot 
be so earned without a further increase in con¬ 
sumption of gas, which in turn must result in 
further reduction of cost and further increase 
of the amount saved by the people. The expe¬ 
rience of the English companies under the 
sliding scale system shows that while, at the 
outset, the saving to the community and the 
amount paid on the increase of dividend were 
about equal, after a series of years the savings 
to the consumer were from three to seven times 


114 BUSINESS —A PROFESSION 

as great as the increase of dividends to stock¬ 
holders. 

If the demand for municipal ownership in 
America can be stayed, it will be by such wise 
legislation as the Public Franchise League has 
promoted and by such public service as Mr. 
Richards and his associates are rendering in 
the management of a private corporation. 


LIFE INSURANCE: THE ABUSES AND 
THE REMEDIES 1 


Mr . President and Gentlemen: — 

Eight months ago dissension among guilty 
officers of the Equitable Life Assurance So¬ 
ciety first directed public attention to the 
conduct of the life insurance business. Since 
then the disclosures of financial depravity have 
aroused widespread indignation; but even now 
the importance of the subject is not generally 
realized. 

OUR HUGE LIFE INSURANCE INVESTMENT 

On January i, 1905, there were outstanding 
in the ninety principal legal reserve or old line 
life insurance companies of the United States 
21,082,352 policies. By these policies the 
lives of at least 10,000,000 of our people are 
insured. As these policies were taken out 
largely on the lives of husbands, intending to 
provide for widow and children, it is estimated 
that, on the average, more than four people 

1 Delivered before the Commercial Club of Boston, October 26, 
1905. 


116 


BUSINESS —A PROFESSION 


are interested in each life insured. So we 
have in all about 40,000,000 people, nearly 
one-half of the total population of the United 
States, directly interested in the conduct of these 
ninety companies. The aggregate amount of in¬ 
surance represented by these 21,082,352 poli¬ 
cies was $12,928,493,754. That sum is more 
than the supposed value of all the steam rail¬ 
roads in the United States which on June 30, 
1904, was only $11,244,852,000. It is far more 
than the par value of their aggregate bonds 
and stocks held by the public, which was only 
$9,585,467,711. 

To provide for that insurance these com¬ 
panies received during the year 1904 new 
money in the form of premiums aggregating 
$498,303,279. That is, more than the aggre¬ 
gate interest and dividends paid on all bonds 
and stocks of our steam railroads held by the 
public, which, during the year ending June 30, 
1904, was only $465,872,674. 

On January 1, 1905, these ninety insurance 
companies held assets aggregating $2,573,- 
186,639. That is, more than three times the 
aggregate capital of all the 5,331 national 
banks in the United States reporting June 30, 
1904, which was only $767,378,148. The assets 
of these insurance companies were nearly four- 


LIFE INSURANCE 


117 


fifths as large as the aggregate deposits in all 
the national banks, which were only $3,312,- 
439 > 8 4 i- 

The total income of these insurance com¬ 
panies during the year 1904, including returns 
from investments, was $612,896,887. That 
is, more than the total revenue of the United 
States Government from all sources during 
the year ending June 30, 1905, which was only 
$ 543 , 423 , 8 59 - 24 - 

These figures, huge as they are, cover only a 
part of the direct interest of the American 
people in life insurance. Besides these ninety 
legal reserve companies, there are in the United 
States numberless assessment companies and 
fraternal beneficiary societies which provide 
life insurance. Their members are mainly 
wage-earners who cannot pay the high pre¬ 
miums exacted by the legal reserve companies. 

But even the legal reserve companies insure 
mainly persons of small means, performing 
essentially the function of the savings bank. 
The large company advertises with pride its 
million dollar policies; but in 1904 the aver¬ 
age size of the policy in the Equitable was 
$2,648; in the Mutual Life of New York, 
$2,351; and in the New York Life, only $2,076. 
In the Metropolitan and in the Prudential, 


118 BUSINESS — A PROFESSION 

which join with the ordinary life insurance 
business the specialty of insuring working 
people, the average policy is only $183 and 
$178 respectively. It will be seen therefore that 
in spite of the large policies held by a few indi¬ 
viduals, the life insurance of this country is in 
the main held by what we term “the people” 

— that large class which every system of busi¬ 
ness and of government should seek to protect. 

THE COMPANIES’ CONTROL OF QUICK CAPITAL 

Such is the direct interest of our people in the 
proper conduct of the life insurance business 

— the interest primarily of the home. In¬ 
directly the life insurance business affects our 
industrial and political life no less vitally and 
with perhaps even more far-reaching effects. 
That influence results from the control which 
the largest life insurance companies exercise 
over our business and our political institutions 
by means of the vast accumulation in a few 
hands of the assets held as insurance reserve, 
for deferred dividends or as surplus. 

The aggregate assets of these ninety legal 
reserve companies was, on January 1, 1905, 
$2,573,186,639. Of that sum nearly one-half, 
or $1,247,331,738, was held by the three lead¬ 
ing Wall Street companies, the Mutual Life of 


LIFE INSURANCE 


119 


New York, the Equitable and the New York 
Life, not inaptly referred to as “The Big 
Three” and the “Racers.” One billion two 
hundred and forty-seven million three hun¬ 
dred and thirty-one thousand seven hundred 
and thirty-eight dollars is a vast sum, but the 
control exercised by these three companies 
does not lie mainly in the size of the aggregate 
assets. It results from their character and 
from the conditions under which the funds are 
held. The $1,247,331,738 in assets held by 
these three Wall Street companies is a trifling 
amount as compared with the aggregate wealth 
of the country. What gives to the managers of 
these and allied insurance companies the con¬ 
trol which they exercise over business is the 
fact that the larger part of the aggregate assets 
is quick capital. We have in the United States 
many other great aggregations of assets: in 
manufacturing, mining and commerce, the 
Steel Trust, the Oil Trust, the Beef Trust; 
in transportation, the Northern Pacific-Great 
Northern combination, the Pennsylvania sys¬ 
tem and the New York Central system. Even 
in combinations like these our people recognize 
a menace to our welfare and our institutions. 
But between the vast combinations of capital 
in manufacturing or transportation and the 


120 


BUSINESS —A PROFESSION 


accumulation of capital by the insurance com¬ 
panies there is this marked difference — the 
capital of the manufacturing, of the mining, 
and of the railroad companies is, in the main, 
permanently invested in lands, buildings or 
machinery, in rails, bridges or equipment, or 
it is required for operating their properties. 
The capital of the life insurance companies, on 
the other hand, is mainly free capital. The huge 
manufacturing and transportation companies, 
great and powerful as they are, are directly 
dependent for their prosperity upon the pros¬ 
perity of the country and the service which 
they render from day to day to the people. 
Furthermore they are constant borrowers. 

The situation of the life insurance companies 
is entirely different. Except in respect to the 
growth of their business, they are not dependent 
for their prosperity upon that of the country. 
Indeed, they derive certain benefits in times 
of adversity. While the securities they already 
hold are not of a class to be imperilled, they can 
purchase new securities to better advantage. 
They are the creditors of our great industries, 
with all the power which that implies. 

Of the aggregate capital of these three lead¬ 
ing life insurance companies there is invested 
in real estate only 6.8 per cent. The balance of 


LIFE INSURANCE 


121 


their assets is substantially quick capital. The 
larger part of it is invested in bonds and stocks, 
in collateral loans and money in bank. More¬ 
over, these three companies — the Equitable, 
the Mutual Life and the New York Life — 
have in important respects co-operated with 
each other. 

OTHER QUICK CAPITAL LESS 

Compared with their quick capital, that of the 
great banking institutions of the country seems 
insignificant. The three greatest New York 
banks — the National City, the Bank of Com¬ 
merce and the First National — had on Sep¬ 
tember 30, 1905, in capital and surplus together, 
only $106,264,800. They had, it is true, in de¬ 
posits $421,521,900, an aggregate about as 
large as the assets of a single one of these three 
insurance companies. 

But over their deposits these banks have 
only a limited control. Twenty-five per cent 
must always be held as a reserve. Besides, sub¬ 
stantially all deposits in banks and trust com¬ 
panies are subject to check. This right of the 
depositor to call for his money places a great 
restraint upon the use which it is possible for 
bank managers to make of the funds under 
their control; and these insurance companies 


122 


BUSINESS —A PROFESSION 


are probably the largest depositors. On Sep¬ 
tember 30, 1904, these three insurance com¬ 
panies had deposited in banks and trust com¬ 
panies $77,132,878. Such huge deposits secure 
to the insurance companies an effectual control 
over the banking institutions aside from the 
actual control which they hold through owner¬ 
ship of bank and trust company stocks. 

The assets of the life insurance companies 
are substantially in the absolute control of 
the managers. Their officers know (except as 
to new business) with mathematical certainty 
approximately how much money they will be 
required to pay out each month for years to 
come; because the whole insurance business 
rests upon stability in average death rates. 
The insurance company may use most of its 
capital without danger of its being called by 
those for whom it is held. 

Furthermore, while the amount of withdraw¬ 
als from the banks from time to time is sub¬ 
stantially equal to the deposits, the funds of 
these insurance companies are increasing at an 
alarming rate. To these three companies alone 
there was actually paid in premiums and in¬ 
come from investment in the year 1904, $254,- 
870,441.37. Only $111,161,905.25, or 43.61 
per cent, was paid out by them to the policy- 


LIFE INSURANCE 


123 


holders. The balance (except $7,000) was used 
either for expenses or accumulated for the 
future. In the four years preceding January 1, 
1905, the gross assets held by these three com¬ 
panies increased $353,638,734. 

The power of the financiers who control these 
Wall Street companies is further increased by 
close alliance with other life insurance companies. 
The largest of these allied companies—the Met¬ 
ropolitan and the Prudential — on January 1, 
1905, had assets aggregating $216,659,984, and 
their rate of accumulation is even greater than 
that of the three leaders; for the Metropolitan 
and the Prudential draw from a larger public, 
mainly from the workingmen. In five years 
the assets of these two companies have more 
than doubled. 

The “Big Three,” with their lesser but power¬ 
ful allies, join together in syndicates to insure 
the financing of the great manufacturing and 
railroad combinations, and furnish the weapons 
for our Napoleons of finance. The Northern 
Securities Trust, Morgan’s attempt to per¬ 
fect a monopoly of the railroads in the North¬ 
west; the International Mercantile Marine, 
Morgan’s attempt to monopolize a large part 
of the shipping of the world; Harriman’s and 
Gould’s ambitious plans — are made possible 


124 


BUSINESS —A PROFESSION 


largely by the gathering of the savings of the 
people in the treasuries of these five insurance 
companies. How this financial community of 
interests operates in even the routine business 
of the companies may be seen from this: The 
Equitable held on January i, 1905, besides 
$11,190,006 Government, State, City and 
County bonds and $3,708,945 Russian railroad 
securities (owned chiefly to comply with the 
requirements of foreign governments), bonds and 
stock of the aggregate cost of $192,849,290. 
Of these securities $184,740,473 — that is, all 
but $8,108,817 (or four per cent) — were of cor¬ 
porations in which either one or more of the 
directors of the Equitable were interested as 
directors or which were parts of systems con¬ 
trolled by such corporations. 

When such facts are considered, it becomes 
obvious why the financiers who control these 
great insurance companies with their huge 
quick capital exercise a predominating influ¬ 
ence over the business of the country. The 
economic menace of past ages was the church 

— the dead hand, which gradually acquired a 
large part of all available lands. The greatest 
economic menace of to-day is a very live hand 

— these great insurance companies which are 
controlling so large a part of our quick capital. 


LIFE INSURANCE 


125 


HOW POWER ENTRUSTED WAS ABUSED 

Such is the power which the American people 
have intrusted to the managers of these large 
companies. How has it been exercised? Sub¬ 
stantially as all irresponsible power since the 
beginning of the world: selfishly, dishonestly, 
and in the long run, inefficiently. The breaches 
of trust committed or permitted by men of high 
financial reputation, the disclosure of the pay¬ 
ment of exorbitant salaries and commissions, 
the illegal participation in syndicate profits, 
the persistent perversion of sacred trust funds 
to political purposes, the co-operation of the 
large New York companies to control the leg¬ 
islatures of the country — these disclosures are 
indeed distressing; but the practice of delib¬ 
erate and persistent deception of the public 
which the testimony discloses, though less dra¬ 
matic, is even more serious. Talleyrand said, 
“ Language was made to conceal thought.” 
George W. Perkins would teach us that “Book¬ 
keeping was made to conceal facts.” Con¬ 
sider for a moment his situation. An impor¬ 
tant member of the most famous banking firm 
in America, and next to the Rothschilds the 
most famous in the world, confesses this: 

The New York Life company, of which he is 


126 


BUSINESS —A PROFESSION 


the vice-president, held on December 31, 1903, 
an investment taken through his firm, J. P. 
Morgan & Co., of $4,000,000 in bonds of the 
International Mercantile Marine. It was a 
poor investment. It was deemed unwise to 
make known to the insurance departments and 
to present and prospective policy-holders the 
fact that so large an investment in these unfor¬ 
tunate securities was held by his company (and 
doubtless also how much they had depreciated 
in market value). 

Perkins, the vice-president of the New York 
Life company, and at the same time a member 
of J. P. Morgan & Co., goes through the form 
on December 31, 1903, of selling $800,000 of 
these bonds to his firm at par, and then on Jan¬ 
uary 2, 1904, re-transferring the same to the 
insurance company at par and interest. This 
was done in order that the officers of the com¬ 
pany might under oath present to the insur¬ 
ance departments of the several States and 
countries an official statement which would 
show that the insurance company did not at 
the close of the year 1903 hold as many of 
these bonds as was the fact, and that the value 
of those held was par (which was not the fact). 

Again, Perkins confesses that in order to pre¬ 
vent the company’s exclusion from Prussia by 


LIFE INSURANCE 


127 


reason of holding among its investments a large 
amount of stocks, entries were made in the 
books of account showing a sale of these stocks. 
The fact is that the stocks were not actually 
sold, but that their ownership was concealed; 
and that in order to account on the books for 
the proceeds of this fake sale, two minor em¬ 
ployees of the company — one of them a colored 
messenger with a salary of $600 per year — 
were made to give their notes for $3,357,000 
with the stock as collateral; and the notes 
were then represented among the assets. The* 
original purpose of this elaborate system of 
fraud may have been merely to deceive the 
Prussian government; but with a degree of 
thrift rare in the management of these com¬ 
panies, it was used also to deceive our own in¬ 
surance commissioners and the policy-holders. 
The New York Life had the effrontery up to 
the time of Perkins’s examination to declare 
in extensive advertising that it held no stocks 
whatever. 

In the case of common criminals flight is 
accepted as confession of guilt. With financiers 
and business men falsification of books has 
hitherto been considered the strongest evidence 
of guilt. Yet the falsification of the books of 
these companies has been a persistent practice. 


128 


BUSINESS —A PROFESSION 


Secret ledgers have been opened in which were 
entered questionable investments and more 
questionable expenditures. Hundreds of thou¬ 
sands spent “for legislative purposes” were 
charged up in real estate accounts. So elabo¬ 
rate has been the system of fraudulent entries 
that after months of investigation the partic¬ 
ular form of rascality embodied in the Equi¬ 
table’s $685,000 Mercantile Trust Company, 
so-called “yellow-dog,” account has not yet 
been detected. 

The degree of guilt involved in such trans¬ 
actions will be appreciated only when one re¬ 
members that the life insurance business beyond 
all other in the world rests upon confidence — 
confidence that in the remote, indefinite future 
the present sacrifice of the policy-holder will 
bring protection to widow and children. 

INEFFICIENCY IN MANAGEMENT 

But the management of these companies has 
been not only selfish and dishonest; it has also 
been singularly inefficient; and it is by this in¬ 
efficiency that the policy-holders have actually 
suffered most. The losses of policy-holders 
through exorbitant salaries and syndicate oper¬ 
ations, though large in the aggregate, are small 
as compared with the loss from bad management. 


LIFE INSURANCE 


129 


The test of success in the life insurance business 
is of course to furnish insurance of absolute 
safety at the minimum cost. The size of a life 
insurance company is no evidence of success. 
It is evidence of energy; it is evidence of busi¬ 
ness skill; but the writing by the Mutual Life 
of $1,578,931,833 of insurance and the control 
of $442,061,529 in assets is, in itself, no more 
evidence of success as an insurance company 
than the display of a $12,000 rug in the office 
of its president. In life insurance, success is 
proved by a small pro rata expense account, a 
large percentage of return upon absolutely 
safe investments and a small per cent of lapsed 
and surrendered policies. 

Now what is the record of the three largest 
life insurance companies of the world in this 
respect? Exclusive of taxes and fees, the per¬ 
centage of expense to total premium income for 
1904 was this: 

New York Life, 22.73 P er cent. 

Equitable, 22.78 per cent. 

Mutual Life, 24.65 per cent. 

These expense percentages are appalling; and 
yet the companies which, besides issuing ordi¬ 
nary life policies, make a specialty of insuring 
the workingmen show an even greater percent¬ 
age of expense to all premium receipts, namely: 


130 


BUSINESS —A PROFESSION 


Metropolitan Life, 37.09 per cent. 

Prudential, 37.28 per cent. 

This Prudential Company, which advertises 
itself as the Rock of Gibraltar, takes for its 
officers and other management expenses on the 
average of all business 37.28 cents for every 
dollar which the policy-holders deposit with 
it. On the industrial business, the working¬ 
man’s insurance, the percentage taken is even 
larger. In addition, the company pays to stock¬ 
holders in dividends each year an equivalent 
of 219.78 per cent on the cash paid into the 
company on the capital stock. 

SAVINGS BANKS BY CONTRAST 

Compare these huge life insurance compa¬ 
nies’ charges for managing savings with the cost 
of running the Massachusetts savings banks. 
There are in Massachusetts 188 savings banks 
under the management of probably about 
3,000 different individuals acting as trustees 
without compensation. At the close of the finan¬ 
cial year, October 31, 1904, these banks held 
assets aggregating $674,644,990.17, more than 
half the aggregate held by the three largest life 
insurance companies of the world. There had 
been deposited in these 188 savings banks during 
the year ending October 31, 1904, $105,466,- 


LIFE INSURANCE 


131 


148.68, an amount exceeding half the aggregate 
of the year’s premiums of these three companies 
($206,132,511.44). The aggregate expense of 
taking care of the business of these 188 savings 
banks for the year 1904 was $1,546,904.44, or 
less than one-thirtieth of the aggregate expense 
of these three insurance companies ($48,106,- 
809.00) for the year. 

To manage the 188 Massachusetts savings 
banks cost 23-100 of one per cent of the average 
assets held during the year, or but 1.46 per cent 
of the year’s deposits. To manage the three 
large life insurance companies cost 4.03 per cent 
of their aggregate average assets and 23.33 per 
cent of the year’s premium income. That 
is, the pro rata cost of conducting the insur¬ 
ance business and taking care of the savings 
invested in these three insurance companies 
was seventeen times as great as the expense of 
caring for savings invested in our 188 savings 
banks. 

Compare now the service rendered by these 
two classes of savings institutions. The high- 
priced insurance managers with their banking 
and trust company adjuncts and high finance 
directorates earned for their three companies 
during the year 1904 the following gross return 
on investments: 


132 


BUSINESS —A PROFESSION 


New York Life.4.14 per cent. 

Equitable.4.22 “ 

Mutual Life.4.24 “ 

Average.4.20 “ 

The faithful treasurers of the 188 modest 
Massachusetts savings banks, supervised mainly 
by obscure but conscientious citizens, earned 
during the year ending October 31,1904, 4.40 per 
cent on the average assets. The return earned 
by our savings banks is thus five per cent 
greater than that of the three insurance com¬ 
panies, and a comparison of net returns is even 
more favorable to the savings banks. I do not 
say that the income returns of the great com¬ 
panies manned by the great financiers was un¬ 
reasonably low, but merely that the small banks 
with their low salaried officers earned more. 

LOSS THROUGH LAPSED POLICIES 

The average rate of dividends actually paid 
or credited to the depositors in our savings banks 
for the year ending October 31, 1904, was 3.75 
per cent with interest compounded semi-annu¬ 
ally, and in 1904 no depositor in a Massachu¬ 
setts savings bank lost a dollar of the principal 
deposited. On the other hand, the practice of 






LIFE INSURANCE 


133 


the insurance companies in relation to forfeiture 
and surrender of policies has resulted in a large 
percentage of the policy-holders losing a great 
part of all they had paid in premiums. 

The whole structure of life insurance rests 
upon this postulate: while the duration of life 
of any individual is uncertain, the average dura¬ 
tion of the lives of a large number is certain. 
You cannot tell how long any one man of say 
twenty-five years will live, but you can say 
with certainty that the average age which any 
thousand men of twenty-five years now living in 
this country will attain is 63.81 years, and that 
on the average they will die three and one-half 
years later than another thousand who are 
thirty years old. If each of these men wanted 
$1,000 insurance payable at death — the an¬ 
nual premium for each — (aside from the ex¬ 
pense of management) is that sum, which, in¬ 
vested and compounded at the rate which it is 
assumed the investment will pay (now taken as 
low as 1^/2 per cent or 3 per cent), will at the 
end of 38.81 years yield $1,000. Now among 
these 1,000 persons the number of deaths in¬ 
creases each year. But under the level pre¬ 
mium system practised by the legal reserve 
companies, the premium is always the same; 
that is, in the earlier years the insured pays not 


134 


BUSINESS —A PROFESSION 


only a premium commensurate with the risk of 
the year, but something on account of the 
greater risk of future years. For instance, a 
man at twenty-five pays a premium about 
twice that which represents the risk of his dying 
in that year. 

Now, a life insurance policy by its terms is 
usually forfeited unless full premiums are paid 
for the first three years. Forfeited policies are 
termed “lapsed” policies. The lapse of a policy 
results in total loss to the insured of his premium, 
except for the protection temporarily enjoyed. 
The voluntary surrender of a policy after three 
full years’ premiums are paid results in a loss 
of part of the premiums paid — because the 
companies pay on surrender only a fraction of 
its actual legal reserve value ( e . g., in 1904 the 
Mutual Life paid on surrender only 63.15 per 
cent of such value). Experience, especially in 
these large companies, shows that the mortality 
of life insurance policies is very much greater 
than the mortality among policy-holders. The 
life of an ordinary life policy is short, not be¬ 
cause life is short, but because most policies do 
not come to their natural termination. Thus, 
in the year 1904 the policies in the Mutual Life 
which came to a natural termination by death, 
maturity or expiry aggregated only 9,269 in 


LIFE INSURANCE 


135 


number and $28,278,464 in amount insured; 
while 7,011 policies aggregating $16,896,941 
were surrendered, and 33,215 policies aggre¬ 
gating $74,909,054 lapsed. 

Among the companies which make a specialty 
of insuring workingmen, the mortality of the 
policies is very much greater. In 1904, 116,894 
of the Metropolitan Company’s industrial poli¬ 
cies terminated by death and expiry; but 
1,223,832 terminated by lapse and 61,220 by 
surrender; that is, only one policy in twelve 
came to a natural end. In the Prudential Com¬ 
pany the condition was even worse. There 
82,963 terminated by death and expiry; 945,- 
640 by lapse, and 45,361 by surrender; that is, 
only one policy in thirteen came to a natural end. 

WHY POLICIES LAPSE 

People who take out fire insurance policies 
generally continue the insurance, although a 
fire policy could be dropped after the term 
without the insured losing anything, since the in¬ 
sured has had his full protection. But in life 
insurance, where a large premium is paid in early 
years on account of the greater mortality of later 
years, the policy-holder who allows his policy 
to lapse loses the reserve which had accumulated 
for him. What is the explanation of this huge 


136 


BUSINESS —A PROFESSION 


mortality in life insurance policies? It can be 
only this: men are induced to take out life in¬ 
surance by misrepresentation, or by promises 
which are not realized; and the extravagant 
conduct of the business renders the cost of the 
life insurance so great that the insured cannot 
continue to carry it. 

THE WASTE IN SOLICITING 

Consider how great this expense of solicita¬ 
tion is. In the year 1904 the New York Life 
spent in agents’ commissions 11.62 per cent of 
all premiums received; the Equitable, 11.81 
per cent; the Mutual Life of New York, 13.57 
per cent; the Metropolitan, 15.01 per cent; 
and the Prudential, 18.98 per cent. Note that 
this is the average percentage paid for commis¬ 
sions on all policies, old and new. The percent¬ 
age on new business is of course much greater. 
The Mutual Life paid in 1904 for commissions on 
new business $6,691,016.56 out of premiums 
aggregating $14,676,651.60, or 45.58 per cent 
of the year’s premiums on new business. Yet 
those figures present only a part of the expense 
of solicitation. There is, in the next place, all 
the advertising. For that the Mutual paid in 
1904 the greater part of the amount charged to 
“ advertising, printing and postage,” which 


LIFE INSURANCE 


137 


amounts to $1,1345833.76, or 7.73 per cent of 
the year’s premium receipts from new business; 
and besides this, there is all the office and in¬ 
spection expense directly entailed by this ex¬ 
tensive solicitation. The extent to which solici¬ 
tation is carried may be inferred from the fact 
that in the year 1904 the Equitable, the Mu¬ 
tual Life and the New York Life actually wrote 
102,314 policies carrying an aggregate insur¬ 
ance of $244,862,421, which were not even 
taken. That is, the applicant did not pay the 
first premium. He was brought “to water,” 
but could not be made “to drink.” The ag¬ 
gregate expense of solicitation in these three 
companies must approximate sixteen per cent 
of all premium receipts. When it is borne in 
mind how small a part of the policies come to 
the natural end of fruition to the policy-holder, 
and how great consequently is the loss to the 
policy-holder from lapsed and surrendered poli¬ 
cies, the extent of the economic waste resulting 
from solicitation as practised will be realized. 

SAVING THAT IS LOSING 

Life insurance is but a method of saving. The 
savings banks manage the funds until such time 
as they shall be demanded by the depositor — 
the insurance company ordinarily until the de- 


1S8 


BUSINESS —A PROFESSION 


positor’s death. The savings bank pays back to 
the depositor his deposit with interest less the 
necessary expense of management. The insur¬ 
ance company in theory does the same. The 
difference is merely that the savings bank un¬ 
dertakes to repay to each individual depositor 
the whole of his deposit with interest; while the 
insurance company undertakes to pay to those 
who do not reach the average age more than 
they have deposited (including interest), and to 
those who exceed the average age less than they 
deposited (including interest). 

How many wage-earners would insure in 
these companies if they were told that for every 
dollar they pay, forty cents will go to the stock¬ 
holders’, officers’ and agents’ salaries, or for 
other running expenses? How many wage-earn¬ 
ers would assume the burden of premiums if 
they knew that there is but one chance in 
twelve that they will carry their policies to 
maturity? 

How idle is the boast sometimes made by 
these companies that they have returned to the 
policy-holder the whole of his premiums. It is 
as if the savings bank should boast of return¬ 
ing to the depositor all of his deposit but with¬ 
out any interest. Such practically is what the 
Equitable, the New York Life and the Mutual 


LIFE INSURANCE 


139 


Life do to-day. The average expense of the three 
companies, exclusive of taxes and fees, was 4.03 
per cent of their aggregate assets, while the 
average of the return of the three companies on 
investments was 4.20 per cent. It means in 
plain English that the company takes as com¬ 
pensation for the care of the policy-holder’s 
money all that that money earns. Such were 
the terms on which, during the troubled times 
of the Napoleonic wars, the Duke of Hesse is 
said to have intrusted his money to Meyer 
Amschel Rothschild, and to have laid the foun¬ 
dation for what, at least until recently, was the 
world’s greatest fortune. 

CAUSES OF ABUSES GENERAL 

I have referred specifically to only five of the 
ninety principal American legal reserve com¬ 
panies, five which are closely allied with Wall 
Street, which on January 1, 1905, held 56.89 
per cent of the aggregate assets, and which dur¬ 
ing the year 1904 wrote 67.42 per cent of all the 
life insurance written by the ninety companies. 
Of the remaining eighty-five, some are doubt¬ 
less managed far less efficiently and quite as 
dishonestly as any of the leaders; many are, 
no doubt, managed with scrupulous honesty, 
and some with reasonable and comparatively 


140 


BUSINESS —A PROFESSION 


great economy; but the methods of conducting 
the business, particularly of soliciting new busi¬ 
ness, adopted by the leaders, is to a greater or 
less extent, and perhaps necessarily, followed 
by the others at the present time. The existing 
evils are not to be explained by the presence in 
office of dishonest or selfish men. The causes 
which produce these rank abuses are general in 
their operation. The flagrant dishonesty and 
selfishness of the managers of the three leading 
New York companies are the result, not the 
cause, of the abuses. Men of character may 
for a time protect other companies in large 
part from like abuses, but the main cause of 
the evils disclosed lies in the system, rather 
than in the men. 

It is obvious that the American people whose 
attention has once been directed to these 
abuses will not suffer them to continue without 
some attempt at a remedy. What are the reme¬ 
dies proposed? 

FEDERAL SUPERVISION NO REMEDY 

The one most prominently mentioned is Fed¬ 
eral supervision. Under the decisions rendered 
by the Supreme Court of the United States, an 
act providing for Federal supervision would ap¬ 
pear to be clearly unconstitutional. But it is 


LIFE INSURANCE 


141 


apparently believed that the Supreme Court can 
be induced to reverse itself. Senator Dryden 
introduced on February 27, 1905, the bill 
known as No. 7277, to which attention is 
invited. 

Note the provisions by which this bill seeks 
to put an end to the intolerable abuses which 
have been disclosed. An insurance company 
authorized to do business in the State where 
organized may, by filing a copy of its charter 
and a financial statement and depositing $100,- 
000 in securities with the treasurer of the United 
States, secure a United States license, which 
will entitle it to do business in any State unless 
and until the license is revoked by the Federal 
superintendent for failure to pay a judgment, 
or because the company is deemed by him un¬ 
safe. The bill omits very many of the provi¬ 
sions which, for instance in Massachusetts, have 
been inserted for the protection of the policy¬ 
holder; it adds not a single one by which he may 
be better protected. 

But even if the Federal law contained all the 
provisions of the best of the State laws, will the 
insured gain or lose by substituting the super¬ 
vision of one man at Washington for the super¬ 
vision of the several States? Assistant Attor¬ 
ney-General Nash of Massachusetts, in his 


142 


BUSINESS —A PROFESSION 


able argument against Federal supervision, 
has truly said: 

“The wisdom, discretion and honesty com¬ 
posite in fifty States and Territories are more 
to be valued than the excellences of one person 
appointed at Washington. State supervision is 
good or bad, according to the merits of the best 
of the commissioners. Federal supervision 
must be good or bad, according to the qualities 
of one man who is unchecked by the work of 
co-ordinate officials.” 

The sole effect of a Federal law would be 

— the purpose of the Dryden bill may have 
been — to free the companies from the careful 
scrutiny of the commissioners of some of the 
States. It seeks to rob the State even of the 
right to protect its own citizens from the legal¬ 
ized robbery to which present insurance meas¬ 
ures subject the citizens, for by the terms of 
the bill a Federal license would secure the right 
to do business within the borders of the State, re¬ 
gardless of the State prohibitions, free from the 
State’s protective regulations. With a frank¬ 
ness which is unusual, and an effrontery which 
is common — among the insurance magnates 

— this bill is introduced in the Senate by 
John F. Dryden, the president of the Prudential 
Life Insurance Company, the company which 


LIFE INSURANCE 


143 


pays to stockholders annual dividends equiv¬ 
alent to 219.78 per cent for each dollar paid in 
on the stock; the company which devotes itself 
mainly to insuring the workingmen at an ex¬ 
pense of over 37.28 cents on every dollar of pre¬ 
miums paid; the company which, in 1904, made 
the worst record of lapsed and surrendered in¬ 
dustrial policies. 

The Prudential Life Insurance Company has 
a special reason for desiring to avoid State 
supervision. Three years ago the Massachu¬ 
setts insurance commissioner insisted that the 
policy-holders must be protected from the 
scandalous financial relations between the Pru¬ 
dential Company and its allied Fidelity Trust 
Company — from schemes as dangerous to the 
interest of the insured as any laid bare by the 
investigations of the Equitable, the New York 
Life and the Mutual Life. 

Federal supervision is also advocated by Mr. 
James M. Beck (formerly Assistant Attorney- 
General of the United States), the counsel for 
the Mutual Life Insurance Company, and his 
main argument against State supervision ap¬ 
pears to be that the companies pay, in the ag¬ 
gregate, for fees and taxes in the several States 
$10,000,000, which he says is twice as much as 
is necessary to cover the expense of proper su- 


144 


BUSINESS —A PROFESSION 


pervision. Ten million dollars is a large sum in 
itself, but a very small one compared with the 
aggregate assets or the aggregate expense of 
management. Mr. Beck’s company paid in 
1904 $1,138,663 in taxes and fees. Its man¬ 
agement expenses were $15,517,520, or nearly 
fourteen times as much. Our Massachusetts 
savings banks paid in the year ending October 
31, 1904, $1,627,794.46 in taxes to this Com¬ 
monwealth; that is, $80,890.02 more than their 
whole expense of management, which was 
$1,546,904.44. 

Doubtless the insurance departments of some 
States are subjects for just criticism. In many 
of the States the department is inefficient, in 
some doubtless corrupt. But is there anything 
in our experience of Federal supervision of other 
departments of business which should lead us to 
assume that it will, in the long run, be freer from 
grounds of criticism or on the whole more effi¬ 
cient than the best insurance department of any 
of the States? For it must be remembered that 
an efficient supervision by the department of any 
State will in effect protect all the policy-holders 
of the company wherever they may reside. 
Federal supervision would serve only to cen¬ 
tralize still further the power of our Govern¬ 
ment and perhaps to increase still further the 


LIFE INSURANCE 145 

power of the corporations. Supervision alone 
— whether State or Federal — will not suffice 
to correct existing abuses in the life insurance 
business. 

FUNDAMENTAL CHANGES NECESSARY 

In order to get rid of the abuses, the measures 
to be applied must be radical and compre¬ 
hensive. The changes must be fundamental. 
They are, in my opinion, these: 

Insurance a Method of Saving 

First . The recognition of the true nature of 
the life insurance business; namely, that its 
sole province is to manage temporarily with 
absolute safety and at a minimum cost the 
savings of the people deposited to make ap¬ 
propriate provision in case of death, and that 
since its province is mainly to aid persons of 
small means, it should be conducted as a be¬ 
neficent, not as a money-making, institution. 

Abolish the Blind Pool 

Second . The issuance of deferred dividend 
policies should be discontinued. The legitimate 
business of a life insurance company is to insure 
the life of the individual and to issue life annui¬ 
ties. It should not be used as an investment 


146 


BUSINESS —A PROFESSION 


company or as a means of gambling on the 
misfortunes of others. The deferred dividend 
policy with its semi-tontine provision is open 
to these objections and to others. 

The premium in life insurance is ordinarily 
computed on a higher death rate than actually 
prevails, and a lower return upon investment 
than is actually earned. The profits from these 
and other sources, unless consumed by exces¬ 
sive expenses or accumulated as surplus, are 
commonly payable as dividends to the policy¬ 
holder either in cash or in reduction of future 
premiums. Under the deferred semi-tontine 
dividend policy the dividends are not paid over 
annually to each policy-holder, but are accu¬ 
mulated for long periods and the accumulated 
funds distributed, so far as paid out at all, 
among the surviving policy-holders of a par¬ 
ticular class. 

The dividends thus accumulated form an 
appreciable part of the huge funds controlled 
by the companies. Thus of the $442,061,529.16 
assets held on January 1, 1905, by the Mutual 
Life, $71,539,311.70 consisted of what is 
called “contingent guaranty fund” and what 
is really deferred dividends. Of the $412,438,- 
381 of the assets of the Equitable, it held 
$63,800,000, which it included under the term 


LIFE INSURANCE 


147 


“ surplus,” but which was in fact deferred divi¬ 
dends. The retention of these funds increases 
unnecessarily the control of quick capital in¬ 
cident to a large business. It promotes also 
other evils. It tends to extravagance and in¬ 
efficient management, because it removes the 
protection which flows from the annual ac¬ 
counting. The annual dividend, the best prac¬ 
tical test of the efficiency of the management, 
is thereby denied to the policy-holders. 

The managers control as a “blind pool” this 
huge fund not required as an insurance reserve. 
They may with impunity and without dis¬ 
covery make inroads upon it to cover up ex¬ 
travagance, dishonesty, or the results of in¬ 
efficient management. 

Abolish Lavish Commissions 

Third . Lavish payments for solicitors’ and 
agents’ commissions and for advertising devices 
should be discontinued. Such practices, com¬ 
mon among the promoters of mining enter¬ 
prises and of patents, have no place in the 
business of life insurance. Savings banks have 
no solicitors. The life-insuring habit is well 
established. The three million people in Massa¬ 
chusetts hold in the thirty-three legal reserve 
companies doing business in the Commonwealth 


148 


BUSINESS —A PROFESSION 


U337>795 life insurance policies, and have only 
1,766,614 deposit accounts in our savings banks. 
The people of the whole United States hold one 
such policy for every four persons. Undoubt¬ 
edly many a man has been led by the solicitor’s 
persistence and eloquence to make a thrifty 
provision for his family. No doubt, also, the 
savings bank deposits would be swelled by 
similar exhortation. But can such missionary 
work be justified at an expense of twelve to 
twenty per cent of all premiums paid, when the 
record of lapsed policies shows that the con¬ 
version to that thrift is but temporary? In the 
year 1903 the Metropolitan wrote 1,788,828 
industrial policies; in the year 1904 1,223,832 
of its industrial policies lapsed. In the year 
1903 the Prudential Company wrote 1,468,230 
industrial policies; in the year 1904, 945,640 
of its industrial policies lapsed. No one should 
be induced to take out a policy when the bur¬ 
den is greater than he can carry, or if for other 
reasons it is not for his interest to do so. The 
intelligent agent with the knowledge and a 
recognition of the proper function of the life 
insurance business, and receiving a modest 
compensation, has still an economic justifi¬ 
cation. Many men need the impetus to thrift, 
since wisdom often lags far in the rear of intel- 


LIFE INSURANCE 


149 


ligence; but as the business is now conducted, 
money paid by the insured as a result of solici¬ 
tation is in large part wasted. The existing 
abuse is not that the solicitor earns too much, 
but that his occupation as pursued is economi¬ 
cally unjustified. 

No Forfeiture of Policies 

Fourth. The forfeiture of policies should be 
prohibited. Under the level premium system 
everyone pays each year more than is required 
for the protection of the single year. He pays 
something on account of future years. That 
something ought in every case to be preserved 
for the insured. The excuse offered by the 
companies for lapsing is the great initial expense 
of writing insurance, and that arises mainly 
from the extravagant commissions paid to 
agents and for lavish advertising. With the 
suggested change of method in soliciting, no 
extraordinary expense would be involved in 
writing insurance except the fee for medical 
examination, and that should be paid by the 
applicant as an initiation fee. The insured 
should know when he enters upon the invest¬ 
ment what the initial cost is. 


150 BUSINESS—A PROFESSION 

Standard Forms of Policies 

Fifth. Standard forms of policy should be 
prescribed by law. This would go far toward 
preventing deception. By simplifying and 
standardizing the contracts, in connection with 
compulsory annual dividends, the insured would 
be enabled to compare results in the several 
companies. To-day such a comparison is prac¬ 
tically impossible. The Equitable has out¬ 
standing at least 224 different forms of policy; 
the New York Life, 316; the Mutual Life, 220. 
Standardizing policies would also much reduce 
the work (and hence the expense) of the business. 

Restrict Investments 

Sixth. The investment of the company’s funds 
should be surrounded by safeguards similar to 
those adopted in the case of savings banks. 
This would secure safety. This would also go 
far in preventing the use of funds in speculative 
enterprises, or to advance private interests, and 
greatly limit the possibility of the companies en¬ 
gaging in syndicate operations. Investments 
should not be made in the securities of corpora¬ 
tions in which any executive officer or member 
of the investment committee of the insurance 
company is interested. 


LIFE INSURANCE 


151 


Treasury Safeguards 

Seventh . Further to protect the funds of the 
companies and to prevent their being used 
directly or indirectly to advance the private 
or other interests of officers, provision should 
be made to prohibit the executive officers from 
engaging in any other business or holding office 
in any other business corporations. Treasury 
safeguards also should be adopted to pre¬ 
vent payments without properly authorized 
warrants. 


Accounting and Publicity 

Eighth . Methods of accounting should be in¬ 
troduced which would compel the entry of all 
transactions in a single prescribed set of books, 
and the submission to the directors at all meet¬ 
ings of reports showing in detail the condition 
and the operations of the company. In such 
reports the cost of every department of the 
business and every kind of business transacted 
should be clearly determined and disclosed, and 
likewise the condition, character and result of 
each investment. Publicity as to the policy¬ 
holders also is essential to insure the proper con¬ 
duct of the business by officers and directors. 


152 


BUSINESS —A PROFESSION 


Directors who Direct 

Ninth. The board of directors must be com¬ 
posed of men who recognize the proper func¬ 
tion of life insurance companies, and who, like 
the trustees of our savings banks, recognize the 
sacred trust involved in their control; men 
who are willing to give to the companies the 
time and attention required for the proper per¬ 
formance of a director’s duty; men who, hav¬ 
ing the sole responsibility for the manage¬ 
ment of the company, will not delegate to the 
executive officers or committees powers which 
the board alone should exercise. 

Such comprehensive and fundamental changes 
must be made if existing abuses are to be erad¬ 
icated; but even they will not prove effective 
to protect the insured and the community un¬ 
less in addition: 

Limit the Size of Companies 

Tenth. A limit must be placed upon the size 
of the company. A company may, of course, be 
too small to be a safe or an efficient and eco¬ 
nomical unit; but it is clearly in the interest of 
the insured that the company be not allowed to 
expand beyond the point of greatest efficiency. 
It is clearly in the interest of the whole people 


LIFE INSURANCE 


153 


that it be not allowed to expand beyond the 
point of danger arising from concentration of 
quick capital in the hands of a few individuals. 
The constitutional right to so limit the size of 
insurance companies is undisputed. 

Throughout the early years of our history the 
danger inherent in corporate control was so 
well understood that in every State limits were 
placed upon the amount of the authorized capi¬ 
tal of corporations of various kinds. The fear 
of the power of large banking and industrial 
combinations was then general. Under influ¬ 
ences, not always creditable, and under the 
leadership of New Jersey, that limit upon the 
amount of capital of corporations has been in 
many States removed. Now corporations with 
huge capital are allowed to exist almost every¬ 
where for almost any purpose. Having created 
them we try ineffectually to check their opera¬ 
tions by anti-trust laws. We have tolerated 
these monster manufacturing and mining com¬ 
panies and the great railroad corporations mainly 
because it is believed that somehow, through 
consolidation, the public may be better served. 
But whatever may be true in other fields of 
business, it has been proved beyond doubt that 
in life insurance mere increase in size does not 
tend to lessen cost of management or to increase 


154 


BUSINESS —A PROFESSION 


returns from investment; that the largest com¬ 
panies are unable to serve the public as well as 
smaller institutions. It has also been shown 
conclusively that many of the abuses in the life 
insurance business, now disclosed, result di¬ 
rectly from the size of the companies. Man 
has not kept pace in growth with his works. 
Even the executives of the “Big Three” have 
admitted their inability adequately to super¬ 
vise their companies. Perkins and other wit¬ 
nesses have sought to excuse illegitimate syn¬ 
dicate transactions and speculative underwrit¬ 
ings by the necessities of investing the huge sums 
pouring into the large companies. On the other 
hand, the investigation has also made clear that 
these large insurance companies through the 
power which inheres in the control of quick cap¬ 
ital expose the community to dangers which no 
other kind of corporation presents to so great 
an extent. 

To eradicate abuses — to protect the com¬ 
munity — therefore, it is essential that the in¬ 
suring unit be kept relatively small. You must 
limit the amount of premiums which it may 
receive, and the assets which it may hold — as 
well as the scope and methods of the business. 

These in general are the remedies which in 
my opinion must be adopted to avoid the 


LIFE INSURANCE 


155 


abuses incident to the life insurance business 
as now conducted. 

THE INEVITABLE ALTERNATIVE 

What is the alternative? Not the discon¬ 
tinuance or substantial reduction of life insur¬ 
ance; for life insurance has become a prime 
necessity. Not the continuance of the present 
abuses; for the outraged and enlightened public 
opinion will no longer tolerate them. If our 
people cannot secure life insurance at a proper 
cost and through private agencies which deal 
fairly with them, or if they cannot procure it 
through private agencies except at the price of 
erecting financial monsters which dominate the 
business world and corrupt our political insti¬ 
tutions, they will discard the private agency 
and resort to State insurance. 

Despite your or my protest, the extension of 
government activity into fields now occupied 
by private business is urged on every side. 
Of all services which the community requires, 
there is none in which the State could more 
easily engage than that of insuring the lives 
of its citizens. Stripped of the mysteries with 
which it has been surrounded, and the mislead¬ 
ing devices by which it has been permeated, 
the business of life insurance is one of extraor- 


156 


BUSINESS —A PROFESSION 


dinary simplicity. To conduct it successfully 
requires neither genius nor initiative, and if 
pursued by the State does not even call for the 
exercise of any high degree of business judg¬ 
ment. The sole requisites would be honesty, 
accuracy, persistence and economy. 

The business of life insurance, which the 
companies now make so incomprehensible to 
the insured, consists properly only of three 
elements: 

1. The initial medical examination. 

2. The calculation of the so-called net pre¬ 
mium or insurance and mortality reserve. 

3. The investment of funds. 

The first is the province of the physician; the 
second a mere matter of arithmetic worked out 
by the actuary and now actually performed in 
large part also by our insurance departments 
as a necessary incident of their supervision; 
the third, the proper investment of funds, 
would ordinarily require a high degree of judg¬ 
ment. But if the business were conducted by 
the State, the proper investment of funds would 
not, at least in Massachusetts, present any diffi¬ 
culty. The State and municipal loans would 
take up all insurance reserve. The net indebt¬ 
edness of the Commonwealth on December 31, 
1904, was $74,335,130.12, that of our cities and 


LIFE INSURANCE 


157 


towns $141,658,601. This aggregate of $215,- 
993 ) 73 1 - 11 presents a fund far greater than is 
required as the legal reserve for all the policies 
now outstanding in this Commonwealth. The 
net value of all outstanding legal reserve life 
insurance in Massachusetts on January 1, 1905, 
was only $122,727,918. The aggregate pre¬ 
miums paid in Massachusetts during the three 
years ending January 1, 1905, to the thirty- 
three old line companies was $79,033,991; but 
the increase during those years of legal reserve 
requirement was only $23,122,089. The in¬ 
crease of the net State debt and of the gross 
municipal debt during those years aggregated 
$34,798,132.74. If the State had done this life 
insurance business, the three years’ increase of 
legal reserve would not have sufficed to meet the 
increased borrowings of the State and the mu¬ 
nicipalities. In Massachusetts at least, a safe 
investment for our insurance funds would thus 
be assured. 

The net return from such investment of the 
funds by the State would compare not unfa¬ 
vorably with that now received by the leading 
insurance companies. It is true that the interest 
return on Massachusetts State and municipal 
bonds is less than the present average return 
of the life insurance companies on investments; 


158 


BUSINESS —A PROFESSION 


but that return in case of State insurance would 
be net. There would, as to the reserve funds, be 
no expense of management. Furthermore, the 
investment return of the insurance com’panies 
is being almost steadily reduced, and the insur¬ 
ance reserve on new business is being calculated 
on the basis of three and a half or three per 
cent, which is as low as the average return on 
State and municipal bonds. 

STATE INSURANCE UNDESIRABLE 

In my opinion the extension of the functions 
of the State to life insurance is at the present 
time highly undesirable. Our Government does 
not yet grapple successfully with the duties 
which it has assumed, and should not extend 
its operations at least until it does. But what¬ 
ever and however strong our conviction against 
the extension of governmental functions may 
be, we shall inevitably be swept farther toward 
socialism unless we can curb the excesses of our 
financial magnates. The talk of the agitator 
alone does not advance socialism a step; but 
the formation of great trusts — the huge rail¬ 
road consolidations — the insurance “racers’’ 
with the attendant rapacity or the dishonesty 
of their potent managers, and their frequent 
corruption of councils and legislatures is hasten- 


LIFE INSURANCE 


159 


ing us almost irresistibly into socialistic meas¬ 
ures. The great captains of industry and of 
finance, who profess the greatest horror of the 
extension of governmental functions, are the 
chief makers of socialism. Socialistic thinkers 
smile approvingly at the operations of Morgan, 
Perkins and Rockefeller, and of the Hydes, 
McCalls and McCurdys. They see approach¬ 
ing the glad day when monopoly shall have 
brought all industry and finance under a single 
head, so that with the cutting of a single neck, 
as Nero vainly wished for his Christian subjects, 
destruction of the enemy may be accomplished. 
Our great trust-building, trust-abusing capital¬ 
ists have in their selfish shortsightedness be¬ 
come the makers of socialism, proclaiming by 
their acts, like the nobles of France, “ After 
us, the Deluge!” 


SAVINGS BANK INSURANCE 1 


The average expectancy of life in the United 
States of a man 21 years old is, according to 
MeeclTs Table of Mortality, 40.25 years. In 
other words, take any large number of men who 
are 21 years old, and the average age which 
they will reach is 6iJ4 years. 2 

If a man, beginning with his 21st birthday, 
pays throughout life 50 cents a week into Mas¬ 
sachusetts savings banks, and allows these 
deposits to accumulate for his family, the sur¬ 
vivors will, in case of his death at this average 
age of 613^ years, inherit $2,265.90 if an interest 
rate of 3J4 P er cent a year is maintained . 3 

If this same man should, beginning at age 
21, pay throughout his life the 50 cents a week 
to the Prudential 4 Insurance Company as pre¬ 
miums on a so-called “industrial” life policy 

1 Published in “Collier’s Weekly,” September 15, 1906. 

2 According to the American Experience Table of Mortality, the 
expectancy is 41.53 years; according to Dr. Farr’s General English 
Experience Table No. 3, it is 38.80 years. 

3 The average interest rate paid by the Massachusetts savings 
banks during the ten years ending October 31,1905, was 3.83 per cent. 
The lowest average rate of all these banks in any one year (1903) 
was 3.709 per cent. 

4 The result in other industrial life insurance companies would be 
substantially the same. 


SAVINGS BANK INSURANCE 


161 


for the benefit of his family, the survivors would 
be legally entitled to receive, upon his death 
at the age of 6134 years, only $820.* 

If this same man, having made his weekly de¬ 
posit in a savings bank for 20 years, should then 
conclude to discontinue his weekly payments 
and withdraw the money for his own benefit, he 
would receive $746.20. If, on the other hand, 
having made for 20 years such weekly pay¬ 
ments to the Prudential Insurance Company, 
he should then conclude to discontinue pay¬ 
ments and surrender his policy, he would be 
legally entitled to receive only $165. 

So widely different is the probable result to 
the workingman if he selects the one or the 
other of the two classes of savings investment 
which are open to him; and yet life insurance 
is but a method of saving. The savings banks 
manage the aggregate funds made up of many 
small deposits until such time as they shall be 
demanded by the depositor; the insurance 
company, ordinarily until the depositor’s death. 
The savings bank pays back to the depositor 
his deposit with interest less the necessary ex¬ 
pense of management. The insurance com¬ 
pany in theory does the same, the difference 

1 The payment to be made by the insurance company would be 
increased by small amounts from time to time paid by way of ben¬ 
efits or dividends if any are declared. 


162 


BUSINESS —A PROFESSION 


being merely that the savings bank undertakes 
to repay to each individual depositor the whole 
of his deposit with interest; while the insurance 
company undertakes to pay to each member of 
a class the average amount (regarding the 
chances of life and death), so that those who 
do not reach the average age get more than they 
have deposited (including interest), and those 
who exceed the average age less than they de¬ 
posited (including interest). The fundamental 
object of both savings and life insurance insti¬ 
tutions is the safe and profitable investment and 
care, at a minimum of expense, of funds con¬ 
tributed from time to time in small amounts. 
To attain this end, the essential qualities on the 
part of the management of both classes of in¬ 
stitutions are good judgment, honesty, econ¬ 
omy and accuracy. 

Why, then, does the workingmen’s invest¬ 
ment in industrial insurance prove relatively 
so disastrous? 

What Industrial Insurance is 

Industrial insurance is simply life insurance 
in small amounts of the kind commonly taken 
by the wage-earner. In the United States the 
policies average now about $140. They serve 
mainly to provide funds to meet the wage- 


SAVINGS BANK INSURANCE 


163 


earner's heavy expenses of a last illness and a 
decent burial. They are considered a prime 
necessity among the working people, so that of 
the 20,936,565 level premium life insurance 
policies outstanding in the ninety American 
companies on January 1, 1905, 15,678,310 were 
industrial policies. 

The peculiar features of industrial as distin¬ 
guished from ordinary life insurance are: — 

(a) That the premiums are fixed for all ages 
at 5 cents or multiples thereof, the variations 
for different ages being in the amount of in¬ 
surance so purchased, whereas in ordinary life 
insurance the variation is in the amount of 
premium. 

(i b ) That the premium is payable weekly, 
whereas in ordinary life insurance the premium 
is payable annually, semi-annually or quarterly. 

(c) That the premium is collected from house 
to house, whereas in ordinary life insurance the 
payments of premium are commonly remitted 
by mail or are made at the office of the company 
or of its agents. 

The Appalling Waste in Industrial 
Insurance 

In the United States about 94 per cent of all 
industrial insurance is furnished by three com- 


Weekly Premium, Ten Cents. 


164 


« 


BUSINESS —A PROFESSION 


w 

w 


W 

s 



One-half the above amounts will be paid for a weekly premium of five cents. No higher premium than ten 
cents will be taken. 

Table showing the rates charged for baby insurance by the Prudential Insurance Company. 

For five cents a week this company will insure a child one year old , paying the parents eight 
dollars in case of death. 






































SAVINGS BANK INSURANCE 


165 


panies, the Metropolitan of New York writing 
49 per cent, the Prudential of New Jersey 36 per 
cent, and the John Hancock of Massachusetts 
9 per cent. Each company issues also ordinary 
life policies. 

The Metropolitan (which alone separates in 
any published statement the expense of its in¬ 
dustrial department from its ordinary life de¬ 
partment) discloses that the managing expenses 
of its industrial department in the year 1904 
(exclusive of real estate taxes, insurance taxes 
and departmental fees) was 42.08 per cent of all 
premium receipts. The expense in the John 
Hancock is stated to be “about” 40 per cent. 
That of the Prudential is probably higher than 
either of the other companies. 

In the year 1904 the average expense of man¬ 
agement of these three companies (including 
both the ordinary life and the industrial de¬ 
partments) was 37.21 per cent of all premium 
receipts. Premium receipts of insurance com¬ 
panies correspond to deposits of savings banks. 
In the same year the percentage of manage¬ 
ment expenses to deposits made during the 
year of the 188 Massachusetts savings banks 
was 1.47 per cent. In other words, the percent¬ 
age of expense of management to premium re¬ 
ceipts of these insurance companies was twenty- 


166 


BUSINESS —A PROFESSION 


five times as great as that of the savings banks 
to their year’s deposits. Yet the percentage of 
expense of the industrial department of these 
insurance companies alone is even greater than 
37.21 per cent of the premium receipts, the com¬ 
panies’ percentage of expense being reduced by 
reason of the fact that the companies issue also 
ordinary life policies. Even the extravagantly 
managed Mutual Life, New York Life and 
Equitable (which issue only ordinary life poli¬ 
cies) took for such managing expenses in 1904, 
on the average, only 23.33 P er cent °f the year’s 
premium receipts; while the Metropolitan, the 
Prudential and the John Hancock (which is¬ 
sued both kinds of policies) took 37.21 per cent. 

It is true that the collections of premium by 
an insurance company are partly for the purpose 
of carrying insurance risk, as well as for that 
of investment, while the deposits in a savings 
bank are accepted solely for the purpose of in¬ 
vestment, but this circumstance does not by 
any means wholly destroy the significance of 
the foregoing comparisons. 

How heavy the burden is which the present 
system of industrial life insurance imposes upon 
the workingman can, however, be fully appre¬ 
ciated only if we bear in mind the following 
facts:— 


SAVINGS BANK INSURANCE 


167 


First — The Double Premium 

The premium payable for any given amount 
of industrial insurance is about double that 
payable on ordinary life non-participating 
policies. 

Thus, in the Metropolitan, an industrial 
policy-holder insuring at age 21 would pay 60 
cents a week, or in the aggregate 31.20 a year 
for a $984 policy, while he would pay only $16.55 
a year for an ordinary life non-participating 
$1,000 policy. In the Prudential a man of 40 
would pay 50 cents a week, or in the aggregate 
$26 a year, for a $500 policy, while he would 
pay only $27.03 for an ordinary life non-partici¬ 
pating $1,000 policy. 

Second — The Quadruple Expense of 
Management 

The proportion of the premium taken for 
management expenses in the case of industrial 
insurance is about twice as great as in the case 
of ordinary life non-participating policies; and, 
since the premium also is about twice as great 
as for an ordinary non-participating life policy 
of like amount, it follows that the industrial 
policy-holder pays toward expense of manage¬ 
ment four times as much as even the pres- 


168 


BUSINESS —A PROFESSION 


ent expense charge borne by the ordinary life 
policy-holder for the same amount of insurance. 

Third — The High Lapse Rate 

About two-thirds of all industrial policies 
lapse and are forfeited within three years of 
the date of issue, the premiums paid thereon 
proving a total loss to the policy-holder. In the 
year 1904, 87 per cent of the industrial policies 
in the Metropolitan, the Prudential and the 
John Hancock which terminated within the 
year were forfeited; and only 13 per cent re¬ 
sulted in any payment to the insured. 

Of the 2,761,449 industrial insurance policies 
in these three great companies which terminated 
by death, surrender and lapse during the year 
1904, aggregating in amount $422,633,987, pay¬ 
ment was made to insured on only 347,072, or 
about one-eighth of the policies. In other words, 
the holders of 2,414,377 policies, with aggregate 
insurance of $379,708,958, made a total loss of 
all premiums paid. 

The fact that more than 40 per cent of each 
premium goes to expense of management, when 
taken alone, fails, therefore, to show how great 
this industrial insurance waste is. We must 
remember that the expense is more than 40 per 
cent of a premium which is double the ordinary 


SAVINGS BANK INSURANCE 


169 


premium. But even these facts considered to¬ 
gether do not fully disclose the waste. They 
indicate only the loss to persisting policy-holders. 
We must remember also that those whose poli¬ 
cies lapse — a great majority of all who insure 
— lose also (except for the temporary protec¬ 
tion) the whole ioo per cent of their premiums. 

The Causes of this Waste 

What are the causes of this appalling waste of 
the workingmen’s savings? 

(A) Not Financial Depravity 

Financial depravity is not an important cause. 
The recent insurance investigations have, it is 
true, disclosed in the Metropolitan and in the 
Prudential, as in the Equitable, the New York 
Life and the Mutual Life of New York, grave 
breaches of trust. These industrial companies 
also have paid exorbitant salaries. In them 
also official position and policy-holders’ money 
have been used for private profit. By them 
also illegal contributions have been made to 
secure legislative favors. And, in addition, the 
stockholders of the Metropolitan and of the 
Prudential have, to a degree unknown in ordi¬ 
nary life companies, received unjustifiable divi¬ 
dends. The capital of the Prudential has been 


170 


BUSINESS —A PROFESSION 


swelled from $91,000 to $2,000,000 out of the 
premiums exacted from workingmen, so that 
now the company, while paying nominally a 
10 per cent dividend, in fact pays to its stock¬ 
holders in dividends each year an equivalent of 
219.78 per cent on the cash actually paid in on 
the capital stock. The capital of the Metropoli¬ 
tan likewise has been swelled out of wage- 
earners’ premiums from $500,000 to $2,000,000, 
so that now the company, while paying nomi¬ 
nally a 7 per cent dividend, in fact pays to 
stockholders each year an equivalent of 28 per 
cent on the cash actually paid in on the capital 
stock. The profitableness of the business to 
stockholders and officers is further shown by the 
fact that the Metropolitan, in order to increase 
its own business and to eliminate competition, 
bought out, in 1902, a small Kentucky com¬ 
pany on terms which netted its stockholders 
nearly $400 per share for stock on which only 
$100 had been paid in. 

But the amount diverted from policy-holders 
by financial irregularities, though large in the 
aggregate, is small as compared with the total 
of premiums paid. Financial depravity does 
not explain why in fifteen years the workingmen 
of Massachusetts have paid $55,285,744 in in¬ 
dustrial premiums to these three companies, 


SAVINGS BANK INSURANCE 


171 


and received back in all only $19,881,353; that 
i s >35-96 per cent of the aggregate premiums paid, 
without interest. 1 The John Hancock appears 
to have been managed throughout with scru¬ 
pulous honesty as a mutual company, and yet 
in the fifteen years ending December 31, 1904, 
it took from Massachusetts industrial policy¬ 
holders in premiums $18,319,730, and paid to 
them only $5,942,033, or 32.43 per cent, without 
interest, of the premiums paid. 2 

( B) Not Mere Extravagance 

Nor is this fearful waste of workingmen’s sav¬ 
ings due to mere extravagance in management. 
The working organization of these companies 
is said to be admirable; and, aside from a few 
exorbitant official salaries in the Metropolitan 
and the Prudential, the employees of the three 
companies are certainly not overpaid on the 
average. The Armstrong Report states that, of 
the 12,000 or 13,000 agents in the Metropolitan, 
“an enterprising man who devotes his whole time 
to the business” received an average of $11.64 
per week; the 2,112 clerks, an average of $15; 
the “about 2,700 assistant superintendents,” 

1 The figures for the United States are not available, the payments 
to industrial policy-holders not being separated from those to ordinary 
policy-holders. 

2 The insurance reserve and some surplus were, of course, accu¬ 
mulated also. 


in 


BUSINESS —A PROFESSION 


$25 a week; and the “about 350 superinten¬ 
dents,$50; and that the fees paid for each 
medical examination and inspection were 50 cents 
and 25 cents respectively: that the Prudential 
paid to 8,582 agents on the average $14.61 per 
week; to 1,751 assistant superintendents,$24.24; 
and to 223 superintendents, $95.55. Obviously, 
therefore, mere extravagance is not the cause 
of this waste of workingmen’s savings. 

(C) The System Vicious 

The real cause of these meagre results to the 
insured from industrial insurance is not finan¬ 
cial depravity or extravagance, but the extraor¬ 
dinary wastefulness necessarily attendant upon 
the present system of supplying life insurance 
for workingmen. 

The principal elements of expense in indus¬ 
trial insurance are: 

(1) The initial expense on issue of policies, 
taken in connection with the large percentage 
of policies lapsed. 

(2) The expense of house-to-house collection 
of weekly premiums. 

(A) The Initial Expense 

The average initial expense as figured by the 
Metropolitan was, in 1904, $2.07 per policy on 


SAVINGS BANK INSURANCE 


173 


which the average premium was 12 cents weekly. 
It is probably about the same in other com¬ 
panies. In the John Hancock the initial ex¬ 
pense includes the agent’s commission at the 
rate of 48 cents for placing a policy bearing 5 
cents weekly premium, and the physician’s fee 
of 50 cents. But the issue of each policy involves 
besides these specific charges a large pro rata 
for general expense, the exact amount of which 
is not supplied by the published accounts. The 
initial charge, while large in itself as compared 
with the year’s premiums, becomes particularly 
burdensome to persisting policy-holders by 
reason of the heavy lapse rate. 

“From the most careful accounting made 
time and again,” says the John Hancock, “the 
weekly premium policies do not square them¬ 
selves and make good the initial and current 
expenses and loss and provide for the State re¬ 
quirement of reserve, until at least three full 
years’ premiums have been paid. . . . Not a 
policy that lapses before at least three full 
years’ premiums have been paid but leaves 
a greater or less deficiency for the survivors to 
bear. . . ” 

“ On the average fully one-half the entrants 
lapse their policies before the end of the first 
year and a majority of these within the first 


174 


BUSINESS —A PROFESSION 


quarter, though no policy lapses until four 
weekly premiums are overdue.” 

The experience of the John Hancock is, of 
course, not exceptional. The Metropolitan 
lapse rate appears to be larger, and that of the 
Prudential still larger. The Armstrong Com¬ 
mittee found that in the Metropolitan, — 

“More than one-third of the policies issued do 
not survive three months, and about one-half are 
cancelled within a year. In 1903 the company 
took one week’s industrial issue from each month 
in the year, and followed the issue through a period 
of twelve months, with the following result: 


Rate of lapses in first 3 months from date of issue 

“ “ “ 6 “ “ “ “ 

tt tt tt g it tt it (l 

a tt tt u tt u tt 


Per cent. 

• 35-40 

• 43-57 

. 48.28 

. 51.46 


In 1904 the average time for which premiums 
were paid on policies which lapsed within one 
year from issue was 6.05 weeks. 

The net result to the Metropolitan Company 
from each policy so lapsed is as follows: — 


Initial cost of policy.$2.07 

Cost of carrying policy.52 

$2.59 

Average weekly premiums at 12.004 cents for 6.05 weeks .726 
Net loss to the company ( i . e., to the persisting policy¬ 
holders) .$1,864 

Net loss to the insured (12.004 cents per week for 6.05 

weeks).726 








SAVINGS BANK INSURANCE 175 

During the second year (in which about io per 
cent of the policies lapse) and the third year (in 
which about 5 per cent lapse) the net loss to the 
company (that is, to the persisting policy¬ 
holders) grows gradually less, but that to the 
insured whose policies lapse grows very much 
greater. For, while the average net loss to the 
insured whose policies lapse during the first 
year is about 73 cents, the average, figured on 
the same basis, for those whose policies lapse 
in the second year is approximately $8.88, and 
the average net loss to those whose policies 
lapse in the third year is approximately $15.12. 
In 1904 the Metropolitan wrote 1,829,559 new 
policies. Applying the above percentages to the 
business of the Metropolitan for the full years 
of 1904 and 1905, we find that 941,491 of the 
r,829,559 policies written in 1904 must have 
lapsed within the year 1905, and that the net 
loss on these lapsed policies aggregated $2,438,- 
461.68, of which the insured bore $683,522.46, 
and the persisting policy-holders $1,754,939.22. 

(B) The Collection Charge 

But besides the deficit due to lapses the per¬ 
sisting policy-holder bears another fearful bur¬ 
den. Even in the honestly managed John Han¬ 
cock the fee of the collector is 20 per cent of 


176 


BUSINESS —A PROFESSION 


each week’s premium, and this 20 per cent charge 
is only a part of the cost of collection. There 
is in addition necessarily the large expense of 
an elaborate system of superintendence and 
accounting. Bear in mind that 20 per cent of 
an industrial premium is equal to 40 per cent of 
the sum payable as premium for a like amount 
of ordinary insurance. 

Obviously, therefore, a substantial reduction 
of the present cost of industrial insurance is not 
possible unless some radical change of system 
be introduced whereby the initial expenses, the 
cost of premium collection, and the percentage 
of lapses is greatly lessened. 

The Sacrifice of the Thrifty 

The supporters of the present system of in¬ 
dustrial insurance declare that such a reduction 
of expenses and of lapses is impossible. They 
insist that the total loss to the insured and the 
heavy burden to the policy-holders from lapses, 
as well as from the huge cost of premium col¬ 
lection, must all be patiently borne as being the 
unavoidable incidents of the beneficent institu¬ 
tion of life insurance when applied to the work¬ 
ingman. They declare that the appalling waste 
incident to the forfeiture within three years of 
two-thirds of all policies written is a sacrifice 


SAVINGS BANK INSURANCE 


177 


essential to the ultimate salvation of the small 
persisting minority, and that the huge expense 
involved in the house-to-house collection of 
weekly premiums is necessary to prevent still 
more lapses on account of the workingman’s 
alleged lack of thrift. 

It may be questioned whether, in view of the 
heavy expense now attending industrial insur¬ 
ance, the discontinuance of premium payments 
which yield such slight probability of net re¬ 
turns is not evidence rather of thrift than of 
thriftlessness. It is surely difficult to justify a 
system of insurance as to which it may be fore¬ 
told that, of the millions who are entered each 
year at a per capita initial expense of $2.07, a 
majority will not only let their policies lapse 
within the year, but will on the average pay in 
premiums only 72 cents. Does not such a record 
of mortality in policies prove conclusively that 
most of the entrants had been over-persuaded 
or misled into taking the insurance? But if, as 
the companies contend, the discontinuance of 
premium payments is evidence of thriftlessness, 
surely the thrifty who persevere should not be 
compelled to submit to a system which requires 
such great and largely useless sacrifices in the 
supposed interest of a small minority. 

The thrifty workingman, like people of larger 


178 


BUSINESS —A PROFESSION 


means, should have the opportunity of obtain¬ 
ing life insurance at more nearly its necessary 
cost. 

The Remedy 

The sacrifice incident to the present industrial 
insurance system can be avoided only by provid¬ 
ing an institution for insurance which will rec¬ 
ognize that its function is not to induce work¬ 
ing people to take insurance regardless of 
whether they really want it or can afford to 
carry it, but rather to supply insurance upon 
proper terms to those who do want it and can 
carry it, — an institution which will recog¬ 
nize that the best method of increasing the 
demand for life insurance is not eloquent, per¬ 
sistent persuasion, but, as in the case of other 
necessaries of life, is to furnish a good article 
at a low price. 

The Savings Bank the Best Medium 

Massachusetts, in its 189 savings banks, and 
the other States with savings banks similarly 
conducted, have institutions which, with a 
slight enlargement of their powers, can at a 
minimum of expense fill the great need of life 
insurance for workingmen. 

The only proper elements of the industrial 


SAVINGS BANK INSURANCE 


179 


insurance business not common to the savings 
bank business are simple, and can be supplied 
at a minimum of expense in connection with 
our existing savings banks. They are: — 

(a) Fixing the terms on which insurance shall 
be given. 

(b) The initial medical examination. 

(c) Verifying the proof of death. 

The last involves an inquiry similar in char¬ 
acter to that now performed by the clerks of 
savings banks in the identification of depositors. 

The second is the work of a physician, who is 
available at no greater expense to the savings 
bank than to the insurance company. 

The first is the work of an insurance actuary, 
who would be equally available to the savings 
banks as he is to insurance companies, if the 
former undertook the insurance business. And 
the present cost of actuarial service can be 
greatly reduced: first, by limiting the forms of 
insurance to two or three standard forms of 
simple policies, uniform throughout the State; 
and, secondly, by providing for the appoint¬ 
ment of a State actuary, who, in connection 
with the insurance commissioner, shall serve 
all the savings insurance banks. The work of 
such an actuary is, indeed, now necessarily per¬ 
formed in large part in each State by the in- 


180 


BUSINESS —A PROFESSION 


surance department, as an incident of super¬ 
vising life insurance companies. 

The savings banks could thus enter upon the 
insurance business under circumstances sin¬ 
gularly conducive to extending to the working¬ 
man the blessing of safe life insurance at a low 
cost, because: — 

First. The insurance department of savings 
banks would be managed by experienced trus¬ 
tees and officers who had been trained to recog¬ 
nize that the business of investing the savings of 
persons of small means is a quasi-public trust 
which should be conducted as a beneficent and 
not as a selfish money-making institution. 

Second. The insurance department of savings 
banks would be managed by trustees and officers 
who in their administration of the savings of per¬ 
sons of small means had already been trained 
to the practice of the strictest economy. 

Third. The insurance business of the savings 
banks, although kept entirely distinct as a 
matter of investment and accounting, would 
be conducted with the same plant and the same 
officials, without any large increase of clerical 
force or incidental expense, except such as 
would be required if the bank’s deposits were in¬ 
creased. Until the insurance business attained 
considerable dimensions, probably the addition 


SAVINGS BANK INSURANCE 


181 


of even a single clerk might not be necessary. 
The business of life insurance could thus be 
established as an adjunct of a savings bank 
without incurring that heavy expense which 
has ordinarily proved such a burden in the 
establishment of a new insurance company. 

If the individual risks were limited at first to, 
say, $150 on a single life, the business could be 
begun safely on a purely mutual basis as soon as 
a few hundred lives were insured, or earlier if a 
guaranty fund were provided. As the business 
increased, the limit of single risks could be cor¬ 
respondingly increased, but should probably not 
exceed $500. 

Fourth. The insurance department of savings 
banks would open with an extensive and potent 
good will, and with the most favorable condi¬ 
tions for teaching, at slight expense, the value 
of life insurance. The safety of the institution 
would be unquestioned. For instance, in Mas¬ 
sachusetts the holders of the 1,829,487 savings 
bank accounts, a number equal to three-fifths of 
the whole population of the State, would at 
once become potential policy-holders; and a 
small amount of advertising would soon suffice 
to secure a reasonably large business without 
solicitors. 

Fifth . With an insurance clientele composed 


182 


BUSINESS —A PROFESSION 


largely of thrifty savings bank depositors, house- 
to-house collection of premiums could be dis¬ 
pensed with. The more economical monthly 
payments of premiums could also probably be 
substituted for weekly payments. 

Sixth. A small initiation fee could be charged, 
as in assessment and fraternal associations, to 
cover necessary initial expenses of medical ex¬ 
amination and issue of policy. This would 
serve both as a deterrent to the insured against 
allowing policies to lapse and a protection to 
persisting policy-holders from unjust burdens 
which the lapse of policies casts upon them. 

Seventh. The safety of savings banks would, 
of course, be in no way imperilled by extending 
their functions to life insurance. Life insurance 
rests upon substantial certainty, differing in 
this respect radically from fire, accident and 
other kinds of insurance. As Insurance Com¬ 
missioner Host, of Wisconsin, said in a recent 
address: — 

“If we take a number of thousand persons of dif¬ 
ferent ages, nothing is more certain in nature than 
that their natural deaths will occur in a series not 
differing very widely from that of other thousands of 
persons under similar circumstances. 

“The practical experience of this theory has given 
to the world the mortality tables upon which life in- 


SAVINGS BANK INSURANCE 183 

surance premiums are ascertained and the reserves 
for the future needs calculated. 

“No life insurance company has ever failed which 
complied strictly with the law governing the calcu¬ 
lation, maintenance, and investment of the legal 
reserve. . . .” 

The causes of failure in life insurance com¬ 
panies since Elizur Wright established the 
science have been excessive expense, unsound 
investment, or rapacious or dishonest manage¬ 
ment. To the risk of these abuses all financial 
institutions are necessarily subject, but they 
are evils from which our savings banks have 
been remarkably free. This practical freedom 
of our savings banks from these evils affords a 
strong reason for utilizing them to supply the 
kindred service of life insurance. 

The theoretical risk of a mortality loss in a 
single institution greater than that provided 
for in the insurance reserve could be absolutely 
guarded against, however, by providing a gen¬ 
eral guaranty fund, to which all savings-insur- 
ance banks within a State would make small 
pro rata contributions, — a provision similar 
to that prevailing in other countries, where all 
banks of issue contribute to a common fund 
which guarantees all outstanding bank notes. 

Eighth, In other respects, also, co-operation 


184 


BUSINESS —A PROFESSION 


between the several savings insurance banks 
within a State would doubtless, under appro¬ 
priate legislation, be adopted; for instance, by 
providing that each institution could act as an 
agent for the others to receive and forward pre¬ 
mium payments. 

Ninth. The law authorizing the establishment 
of an insurance department in connection with 
savings banks should, obviously, be permissive 
merely. No savings bank should be required 
to extend its functions to industrial insurance 
until a majority of its trustees are convinced of 
the wisdom of so doing. 

The savings banks are not, however, the only 
existing class of financial institutions which 
could be utilized for the purpose of supplying, at 
a low expense rate, insurance in small amounts 
under a system requiring frequent premium 
payments. Co-operative banks, as operated in 
Massachusetts apd in some other States, would, 
under appropriate regulation, be admirably 
adapted to supply a part of the required service. 
The excellent record of these institutions in 
Massachusetts presents a most encouraging 
exhibit of the achievements of financial democ¬ 
racy when applied to small units and when 
operating under a wise system of supervision. 

Public attention having at last been directed 


SAVINGS BANK INSURANCE 


185 


to this subject, our workingmen will not long 
submit to the needless sacrifice of their hard- 
earned savings, described in the following judg¬ 
ment of the “Armstrong Committee” on the 
methods of the Metropolitan Company: — 

“In fine the industrial department furnishes in¬ 
surance at twice the normal cost to those least able 
to pay for it; a large porportion, if not the greater 
number of the insured, permitting their policies to 
lapse, receive no money return for their payments. 
Success is made possible by thorough organization 
on a large scale and by the employment of an army 
of underpaid solicitors and clerks; and from margins 
small in individual cases, but large in the aggregate, 
enormous profits have been realized upon insignifi¬ 
cant investment.” 

If an opportunity for cheaper life insurance 
is afforded by means of an extension of the func¬ 
tions of our savings banks, the present industrial 
insurance companies may be permitted to pursue 
their efforts at inculcating thrift in accordance 
with the system which seems to them wise, and 
their claim that the present huge waste is 
inevitable will be duly tested. 

But if we fail to offer to workingmen some 
opportunity for cheaper insurance through pri¬ 
vate or quasi-private institutions, the ever- 
ready remedy of State insurance is certain to 


186 


BUSINESS —A PROFESSION 


be resorted to soon; and there is no other sphere 
of business now deemed private upon which 
the State could so easily and so justifiably enter 
as that of life insurance. 

However great the waste in present life in¬ 
surance methods, our workingmen will not be 
induced to abandon life insurance. To them, 
as to others, life insurance has become a prime 
need. It must be continued. It should be en¬ 
couraged. In spite of the disastrous results of 
this form of savings investment, the industrial 
insurance business has assumed enormous pro¬ 
portions. On December 31, 1904, the number 
of industrial life policies outstanding in the three 
great companies (Metropolitan, Prudential and 
John Hancock) was 14,731,463, as against a 
total of only about 5,258,255 ordinary life poli¬ 
cies outstanding in the ninety legal reserve com¬ 
panies. The New York Life, with its record of 
957,201 policies outstanding, had only one- 
eighth as many policy-holders as the Metro¬ 
politan, one-sixth as many as the Prudential 
and three-fifths as many as the John Hancock. 
In the year 1904 alone the Metropolitan, Pru¬ 
dential and John Hancock wrote 3,742*209 
industrial policies; that is, more than three 
times as many as the 90 leading level premium 
companies wrote of ordinary life policies during 


SAVINGS BANK INSURANCE 


187 


that year. In Massachusetts the predominance 
of industrial policies is even greater than the 
average. With a population of 3,000,680 there 
were outstanding December 31, 1904, 1,080,003 
industrial policies; that is, one for every three 
inhabitants, counting men, women and chil¬ 
dren, and of ordinary life policies only 257,792 
were outstanding. 

The demand of workingmen for life insurance 
will continue and will grow; but the yearly trib¬ 
ute of the workingmen to Prudential stock¬ 
holders of dividends equivalent to 219.78 per 
cent on the capital actually paid into the com¬ 
pany, the yearly waste of millions in lapsed 
policies, in fruitless solicitation and in needless 
collections, will cease. The question is merely 
whether the remedy shall be applied through 
properly regulated private institutions or 
whether the State must itself enter upon the 
business of life insurance. 


SUCCESSES OF SAVINGS BANK 
LIFE INSURANCE 


The project of the Massachusetts system 
was first published in Collier’s Weekly, Septem¬ 
ber 15, 1906. Its main purpose was to elim¬ 
inate or to mitigate so far as possible, the evils 
incident to the system of industrial life insur¬ 
ance as then practiced by private companies. 
The causes of these evils were investigated; and 
it was proposed to remove them by creating a 
competitive system upon a new plan. 

In 1906 there were outstanding in the United 
States 17,841,396 industrial life insurance poli¬ 
cies, representing $2,453,603,707 of insurance. 
Three companies, the Metropolitan, the Pru¬ 
dential and the John Hancock, did together 
94.3 per cent of this business. The rates and 
terms to policy-holders of the three companies 
did not vary materially the one from the 
others. 

Throughout the thirty years of American ex¬ 
perience in industrial life insurance prior to 
September, 1906, there had been substantially 
no improvement in the position of the policy- 


SUCCESSES OF SAVINGS INSURANCE 189 


holder. On the contrary, it had rather worsened. 
The insured suffered mainly from three evils: 

(a) The high premium. 

(b) Over-persuasion leading to taking out of 
insurance which was bound soon to lapse. 

(c) Illiberal and oppressive provisions in the 
policies. 

During these thirty years the cost of insur¬ 
ance to the policy-holder had gradually in¬ 
creased. In 1887 the rates were on the average 
nearly 12 per cent higher than the rates prevail¬ 
ing from 1879 to *887. In 1896 they were again 
increased about 8 per cent on the average over 
the rates fixed in 1887; and they remained at 
that level until shortly after September, 1906. 
Vice-President Haley Fiske of the Metropolitan, 
testifying before the Armstrong Committee in 
1905, declared that the high expense of industrial 
life insurance was unavoidable. 

During these thirty years the lapse rate had 
not been materially reduced. Of the policies 
written in 1903 more than one-third lapsed 
within three months and more than one-half 
within twelve months from the date of issue. 

During these thirty years the policies, instead 
of becoming more liberal in their provisions, 
had been modified from time to time, so that the 
chances of the insured receiving benefits from 


190 BUSINESS — A PROFESSION 

the insurance were small. For instance: Until 
shortly after September, 1906, the policies pro¬ 
vided that if death occurred within three 
months from the date of the policy nothing 
would be payable under the contract; if death 
occurred after three months and within the 
first six months, only one-quarter of the face of 
the policy would be payable; if death occurred 
after six months and before the end of twelve 
months, one-half the face of the policy would be 
payable. These provisions were much less 
favorable than those prevailing during the ear¬ 
lier years of industrial life insurance in America. 

Furthermore, in 1906 there was no opportu¬ 
nity of getting extended insurance or paid-up 
insurance until after the end of five years after 
the date of the policy, and none of getting a 
cash surrender value at any time. The policies 
had no loan value. 

The Metropolitan Life Insurance Company 
had been quite fully investigated by the Arm¬ 
strong Committee in 1905. The officials of the 
Metropolitan company in testifying before that 
committee could give no promise of any im¬ 
provement in the position of the policy-holder; 
the report of the Armstrong Committee con¬ 
tained no recommendations for remedying the 
evils disclosed; and the New York remedial leg- 


SUCCESSES OF SAVINGS INSURANCE 191 


islation of 1906 was so framed as not to apply to 
industrial insurance. 

The discussions incident to the Massachusetts 
Savings Bank Insurance plan, beginning in 
September, 1906, the enactment of the legisla¬ 
tion on June 26, 1907, and the practical intro¬ 
duction of the system in June, 1908, with the 
actual and potential competition resulting, 
have wrought important changes in the rates, 
methods and practices of the industrial com¬ 
panies which have mitigated in large measure the 
flagrant abuses at which the reform was aimed, 
namely: 

The Changes Wrought 

1. The cost of industrial insurance furnished 
by the Metropolitan and other private companies 
(expressed in the amount purchased by a given 
weekly premium) has been repeatedly reduced 
since September, 1906; so that to-day it is (on 
the average) about 20 per cent lower than it 
was then. 

2. The methods pursued by the private com¬ 
panies in soliciting industrial insurance have 
been improved since September, 1906, so that 
the lapse rate is materially reduced. Thus: 
Taking the three years 1904, 1905 and 1906 the 
percentage of lapse of outstanding policies to 


192 


BUSINESS —A PROFESSION 


the number of policies issued during those years 
was 65. Taking the three years 1910, 1911 and 
1912 the percentage of lapse was only 56. Or, 
making the comparison on the basis of the 
amount of insurance: In the three years 1904, 
1905 and 1906 the amount of insurance lapsed 
was 68 per cent of the amount written; whereas 
in the three years 1910, 1911 and 1912 the per¬ 
centage of lapses was only 58 per cent of the 
amount written. 

3. The provisions of the insurance policies 
issued by the private companies have been made 
more just and liberal. For instance, on January 
1, 1907, the amount payable in case of death 
was increased from nothing, if occurring during 
the first three months, and one-fourth, if occur¬ 
ring during the second three months, to one-half 
the face value of the policy if death occurred at 
any time within the first six months. And the 
amount payable in case of death during any 
part of the second six months was increased 
from one-half to the full face of the policy. 
Under the changes made January 1, 1907, the 
premiums, which previously had been payable 
throughout life, were made to cease at age 
seventy-five. 

4. Paid-up insurance is now granted by the 
private companies after three years, whereas be- 


SUCCESSES OF SAVINGS INSURANCE 193 


fore September, 1906, no paid-up insurance was 
granted until after the end of five years from the 
date of the policy. It is noteworthy that this 
change was effected as of January 1, 1907, al¬ 
though Vice-President Haley Fiske had declared 
before the Armstrong Committee in 1905 that 
“ Any law requiring the issue of paid-up policies 
in industrial insurance after three years would be 
most unjust” to the persisting policy-holders. 

5. Since September, 1906, the private com¬ 
panies have provided for cash surrender values 
after the end of ten years, although previously 
no cash surrender values had been granted. 

6. Since September, 1906, the private com¬ 
panies have made their policies incontestable 
one year after date of issue, whereas theretofore 
the policies had been incontestable only after 
two years. 

7. Since September, 1906, extended insurance 
is said to be granted after three years from the 
date of the policy, whereas none had been 
granted theretofore. 

The improvements made by the private in¬ 
dustrial insurance companies as the result of 
the Massachusetts plan, have of course been 
extended to their entire business throughout 
the United States. When it is remembered that 
the aggregate premium income of the industrial 


194 


BUSINESS —A PROFESSION 


policies in the United States is now about $i 15,- 
000,000 a year, it seems clear that the industrial 
policy-holders throughout the country are to¬ 
day buying their insurance for at least $20,000,- 
000 a year less than they would have had to 
pay for the same amount of insurance had the 
rates prevailing prior to September, 1906, re¬ 
mained in force. 

Massachusetts’ Gain 

The weekly premiums collected by the indus¬ 
trial insurance companies from Massachusetts 
wage-earners each year exceed $10,000,000. 
The saving to the Massachusetts policy-holders 
in the private companies which has resulted 
from the competition of its State-aided system is 
nearly $2,000,000 a year: while the Common¬ 
wealth’s contribution to the expenses of the 
system has averaged less than $15,000 a year. 
But residents of Massachusetts who availed 
themselves of the opportunity which savings 
bank insurance affords, have had these further 
advantages: 

First . The gross rates on the monthly pre¬ 
mium savings bank policies in Massachusetts 
are on the average about 17 per cent less 
than the now prevailing rates of the private 
industrial companies. The Metropolitan and 


SUCCESSES OF SAVINGS INSURANCE 195 


Prudential companies, however, issue only non¬ 
participating policies, whereas the Massachu¬ 
setts savings bank policies are participating. 
The dividends declared on these savings bank 
policies have been as follows: 

Per Cent. 


On policies completing their first anniversary. 8^$ 

On policies completing their second anniversary . . . 12 % 

On policies completing their third anniversary .... 14 

On policies completing their fourth anniversary . . . i6%j 

On policies completing their fifth anniversary .... 20 


Therefore the net cost to the insured, for in¬ 
stance, in the fourth year is, on the average, 
about 32 per cent less, and in the fifth year 35 
per cent less than the present rates of the private 
industrial companies. 

The policies in one of the private companies, 
the John Hancock, are participating, but only 
after five years from the date of issue. 

Second. The policies issued by the Massachu¬ 
setts savings banks are far more liberal even 
than those now written by the private indus¬ 
trial companies. The full face of the policy is 
payable in case of death at any time after the 
issue of the policy. Cash surrender value, paid- 
up insurance and extended insurance are granted 
at any time after six months from the date of 
the issue of the policy. The policies have also 
a loan value after the end of the first year. 





196 


BUSINESS —A PROFESSION 


Third . A recent investigation of the business 
of the banks shows that of the policies issued 
and having twelve months’ experience, 25.5 per 
cent of the number of policies and 26.2 per cent 
of the amount of insurance are cancelled within 
a year, whereas in the large industrial compa¬ 
nies over 50 per cent of the policies written are 
cancelled within the first year. 

Furthermore the so-called cancellations of the 
savings insurance banks include all policies sur¬ 
rendered within twelve months, whether by 
lapse, by death or by surrender for cash. On 
the bank policies surrendered after six months, 
$20,336.50 in cash was returned to the policy¬ 
holders, and other bank policy-holders also re¬ 
ceived by way of amounts applied to purchase 
paid-up insurance $3,924.23. This $24,260.73 
would have been entirely lost to the policy¬ 
holders had they been insured in the industrial 
companies. 

The Insurance Banks 

On February 28, 1914, the insurance depart¬ 
ments of the four savings banks had out¬ 
standing 8413 policies, representing $3,316,005 
insurance and $29,482 annuities. 

Five years after the Massachusetts system was 
introduced, the banks held an accumulated sur- 


SUCCESSES OF SAVINGS INSURANCE 197 


plus equal to nearly io per cent of the aggre¬ 
gate premium income for the five years, and 
equal to 14.8 per cent of the aggregate legal 
policy reserve. 

The aggregate premiums collected during 
these five years were as follows: 


Premium income for the first year.$25,377.29 

Premium income for the second year.58,890.68 

Premium income for the third year.76,348.92 

Premium income for the fourth year.102,832.27 

Premium income for the fifth year.124,205.08 


The Effect on the Banks 

Four banks have established insurance de¬ 
partments, the third not until August, 19n, 
and the fourth on July 5, 1912. Fifteen other 
savings banks and four trust companies have be¬ 
come public agencies for these four banks, and 
there are also twenty-three other public agen¬ 
cies and about two hundred private agencies. 
In two banks, the People’s Savings Bank of 
Brockton and the Whitman Savings Bank, 
the insurance department has been conducted for 
more than five years. The effect has been to 
increase markedly the number of their deposi¬ 
tors. Massachusetts had, in 1911, 192 savings 
banks, of which 144 had deposits exceeding 
$1,000,000. Both the People’s Savings Bank of 







198 


BUSINESS —A PROFESSION 


Brockton and the Whitman Savings Bank were 
among the smaller banks of that class. The 
Whitman bank is located in a town of 7,639 
inhabitants. 

The rate of increase of deposits in these two 
banks, as compared with the other savings banks 
in the State, shows the marked effect which the 
establishment of an insurance department has in 
stimulating the business of the deposit depart¬ 
ment. Of the 144 Massachusetts savings banks 
whose deposits exceeded $1,000,000, these two 
banks stood among the first five in the rate of 
increase in deposits for the year ending Octo¬ 
ber 31, 1910, over the previous year; the Peo¬ 
pled Savings Bank of Brockton standing first 
and the Whitman Savings Bank, fifth. In the 
year ending October 31, 1911, these two banks 
headed this list of Massachusetts savings banks 
in the rate of increase; the Whitman Savings 
Bank standing first and the People’s Savings 
Bank second. That the leading position taken 
in these two years by the Brockton and Whit¬ 
man banks is due to the insurance department 
is made more clear by the fact that the other 
three banks which stood with them among the 
first five in the year 1910 lost their rank as 
leaders in the year 1911. 

The treasurer of the Whitman bank states: 


SUCCESSES OF SAVINGS INSURANCE 199 


“I have been unable to find that the Insurance 
Department has been an injury to the bank in any 
particular. On the other hand, this department has 
brought the attention of the public to this institution, 
with the result that for the past four years our gains 
have been greater than any savings bank in any other 
town in Plymouth County. 

“As savings banks are organized for the purpose 
of encouraging thrift and economy, it would seem to 
me that we have not departed from the original pur¬ 
pose in establishing a life insurance department, which 
bears a close relationship to savings bank business/ 5 

And the treasurer of the People’s Savings 
Bank of Brockton states as follows: 

“The writer has been of the opinion from the start 
that it was a good thing both for the banks and the 
public, and after observing the practical working of 
the plan for a period of a little over three years I can 
say that I am more impressed now than at the be¬ 
ginning. 

“Many criticisms were made, as is always the case 
with anything new, but none of them were well 
founded and none of the disastrous results predicted 
have materialized. 

“The banks are bigger, better and busier than they 
were when the insurance departments were opened, 
and pages could be written setting forth the benefits 
derived by the policy-holders and beneficiaries. 

“Now that there is no longer any doubt of the suc¬ 
cess of the movement, the banks and the public are 
voluntarily interesting themselves in the plan. 


200 


BUSINESS —A PROFESSION 


“The public now come to the bank and apply for 
insurance and I am sure this will increase as time 
goes on and will force all critics back to the tall 
timber.” 

The establishment of an insurance department 
is also serving to develop the habit of saving 
in policy-holders. As to this we have striking 
evidence in connection with the opening of new 
deposit accounts at the times when dividends 
are declared on the policies, and at the times 
when policies are taken out. 

How Bank Insurance is Developed 

The business of the savings insurance banks 
has been developed in large measure through 
the educational work conducted by the Massa¬ 
chusetts Savings Insurance League. This league 
was organized on November 26, 1906, by public- 
spirited citizens of Massachusetts to promote 
the enactment of the savings bank insurance 
law. Its work was educational. It undertook 
to familiarize the people of Massachusetts with 
the evils incident to the then existing system of 
industrial life insurance, and to point out the 
advantages of the Massachusetts plan of sav¬ 
ings bank insurance. After the law was enacted 
the league exerted itself to secure the establish¬ 
ment of insurance departments by the People’s 


SUCCESSES OF SAVINGS INSURANCE 201 


Savings Bank of Brockton, and by the Whitman 
Savings Bank, and also the establishment of 
agencies. Since that time it has been engaged 
in active educational work throughout the Com¬ 
monwealth. It is largely through the medium 
of the League that the advantages of the sys¬ 
tem have been made known to the people. 

The League has been instrumental in inter¬ 
esting the large number of manufacturers and 
others who have established unpaid agencies 
through which the insurance is written. Its 
purpose is to bring to the attention of the 
wage-earners of Massachusetts the importance 
of making wise provision for the future out of 
current earnings, either through life insurance 
or old-age pensions; to endeavor by way of 
suggestion to encourage them to habits of thrift 
and foresight; and to acquaint them with the 
value of savings bank insurance as a means to 
this end. 

The CoMPANIES , Contention 

Officials of the private industrial insurance 
companies point to the relatively small number 
of policies issued by the Massachusetts insur¬ 
ance banks as evidence that the system has not 
succeeded. The contrary is true. The initia¬ 
tion of the competitive system was so effective 


202 


BUSINESS —A PROFESSION 


in reforming the most flagrant of the abuses of 
the industrial companies, that competition with 
them is necessarily much more difficult than it 
would have been had the old conditions per¬ 
sisted. And the benefit of these reforms is now 
enjoyed by nearly every industrial policy-holder 
in the United States. 

It has also been asserted by the Metropoli¬ 
tan Company that while the great improve¬ 
ments in the position of the industrial policy¬ 
holder followed the initiation of the Massa¬ 
chusetts plan, they were not the result of the 
prospective and actual competition of the new 
system. It is believed that no basis exists 
for this contention of the company. There 
was no indication of effort or intention on the 
part of the industrial insurance companies to 
improve the situation of the policy-holder until 
after the Massachusetts campaign was com¬ 
menced by the article in Collier’s. On the con¬ 
trary, the testimony of the Metropolitan’s offi¬ 
cials before the Armstrong Committee indicated 
that improvement was believed to be impossi¬ 
ble. Furthermore the improvement suddenly 
made after the discussion incident to the pres¬ 
entation of the Massachusetts plan, and its 
potential and actual competition are not the 
only evidence that the Massachusetts plan pro- 


SUCCESSES OF SAVINGS INSURANCE 203 


duced the improvements. More will be found by 
comparing the changes made by the industrial in¬ 
surance companies in the provisions of their pol¬ 
icies enumerated above, with the provisions of the 
policies issued under the Massachusetts system. 
The reforms introduced by the industrial com¬ 
panies since September, 1906, are clearly due, in 
the main, to the actual and potential competition 
of Savings Bank Insurance. 

Boston, Mass., April 1, 1914. 

During the ten years which have elapsed since the 
foregoing article was prepared, the amount of insurance in 
force under the Massachusetts Savings Bank Life Insur¬ 
ance system has increased from $3,316,005 to $31,973,302. 

The growth in new business since 1920 has been par¬ 
ticularly rapid: — 


1920 (year ended October 31). 

$2,677,161 

1921 “ “ “ “ . 

1,619,832 

1922 “ “ “ “ . 


1923 “ “ “ “ . 

5 > 6 57.436 

1924 “ “ “ “ . 

6,295,572 

Total net increase during five years . . 

. $19,600,192 


Four additional savings banks have established in¬ 
surance departments, and sixty-three other savings banks 
and twenty-one trust companies have established public 
agencies for the receipt of premiums, besides eleven such 
agencies in national banks, Morris Plan Companies, etc., 
so that the opportunities offered by the system are made 
easily available to the people in all parts of the Common¬ 
wealth. The savings insurance banks may now write 








204 


BUSINESS—A PROFESSION 


policies in $1000 units, thus making it possible to obtain 
a maximum of $8000 insurance on an individual life. 
The net cost of the insurance has steadily grown less, so 
that today (Nov. 1, 1924) it appears to be the lowest cost 
level premium life insurance issued in the United States. 

“Lapsed” policies are practically unknown, due largely 
to the fact that the policyholder is entitled to a surrender 
value if his premiums have been paid for six months. An 
analysis of the business written during the three years 
1920, 1921, and 1922 shows that only 4.27 per cent of the 
policies lapsed within six months from date of issue. 

Within the past two years the public has manifested a 
constantly increasing interest in combining a savings 
bank account and a life insurance policy on a so-called 
ten-year savings-insurance plan, under which by means 
of small monthly deposits $1000 saving is acquired in ten 
years, the depositor being insured meanwhile for $1000. 

The insurance premiums received from policyholders 
since the system was inaugurated have amounted to 
$4,848,865.06. The death claims paid amount to $745,559; 
the dividends to $1,061,565. The sums returned to policy¬ 
holders in the form of surrender values amount to $283,245. 
The amount held in reserve and surplus for the benefit of 
policyholders exceeds three million dollars. Premiums are 
now being received at the rate of $856,524 a year. 

The Savings Bank Insurance Law as enacted by the 
Massachusetts Legislature in 1907 appears to have been 
so carefully drafted as to anticipate with extraordinary 
foresight the situations to be met as the institution grew 
in size. The law has remained unchanged in all essential 
particulars. 

Alice H. Grady, 
Deputy Commissioner for 
Savings Bank Life Insurance. 

State House, Boston, November 1, 1924. 


TRUSTS AND EFFICIENCY 1 


Leaders of the Progressive Party argue that 
industrial monopolies should be legalized, lest 
we lose the efficiency of large-scale production 
and distribution. No argument could be more 
misleading. The issue of competition versus 
monopoly presents no such alternative as 
“Shall we have small concerns or large?” 
“ Shall we have ill-equipped plants or well- 
equipped?” 

In the first place, neither the Sherman law 
nor any of the proposed perfecting amend¬ 
ments (La Follette-Lenroot bill or Stanley 
bill) contain any prohibition of mere size. 
Under them a business may grow as large as it 
will or can — without any restriction or with¬ 
out any presumption arising against it. It is 
only when a monopoly is attempted, or when a 
business, instead of being allowed to grow large, 
is made large by combining competing businesses 
in restraint of trade, that the Sherman law and 
the proposed perfecting amendments can have 
any application. And even then the Sherman 

1 Published in “Collier’s Weekly,” September 14, 1912. 


20G BUSINESS — A PROFESSION 

law and the proposed amendments would not 
necessarily restrict size. They merely declare 
that if there has been such a combination in 
restraint of trade the combiners have the burden 
of showing that it was reasonable, or, in other 
words, consistent with the public welfare; and 
that if such a combination controls more than 
thirty per cent of the country’s business it will, 
in the absence of explanation, be deemed un¬ 
reasonable. 

In the second place, it may safely be asserted 
that in America there is no line of business in 
which all or most concerns or plants must be 
concentrated in order to attain the size of great¬ 
est efficiency. For, while a business may be 
too small to be efficient, efficiency does not 
grow indefinitely with increasing size. There 
is in every line of business a unit of greatest 
efficiency. What the size of that unit is cannot 
be determined in advance by a general rule. 
It will vary in different lines of business and 
with different concerns in the same line. It 
will vary with the same concern at different 
times because of different conditions. What 
the most efficient size is can be learned defi¬ 
nitely only by experience. The unit of greatest 
efficiency is reached when the disadvantages 
of size counterbalance the advantages. The 


TRUSTS AND EFFICIENCY 207 

unit of greatest efficiency is exceeded when the 
disadvantages of size outweigh the advantages. 
For a unit of business may be too large to be 
efficient as well as too small. And in no Ameri¬ 
can industry is monopoly an essential condition 
of the greatest efficiency. 

The history of American trusts makes this 
clear. That history shows: 

First. No conspicuous American trust owes 
its existence to the desire for increased efficiency. 
“Expected economies from combination” figure 
largely in promoters’ prospectuses; but they 
have never been a compelling motive in the 
formation of any trust. On the contrary, the 
purpose of combining has often been to curb 
efficiency or even to preserve inefficiency, thus 
frustrating the natural law of survival of the 
fittest. 

Second. No conspicuously profitable trust 
owes its profits largely to superior efficiency. 
Some trusts have been very efficient, as have 
some independent concerns; but conspicuous 
profits have been secured mainly through con¬ 
trol of the market — through the power of 
monopoly to fix prices — through this exercise 
of the taxing power. 

Third. No conspicuous trust has been efficient 
enough to maintain long, as against the inde- 


208 


BUSINESS —A PROFESSION 


pendents, its proportion of the business of the 
country without continuing to buy up, from 
time to time, its successful competitors. 

These three propositions are also true of 
most of the lesser trusts. If there is any excep¬ 
tion, the explanation will doubtless be found in 
extraordinary ability on the part of the man¬ 
agers or unusual trade conditions. 

And this further proposition may be added: 

Fourth. Most of the trusts which did not se¬ 
cure monopolistic positions have failed to show 
marked success or efficiency, as compared with 
independent competing concerns. 

THE MOTIVES FOR TRUST BUILDING 

The first proposition is strikingly illustrated 
by the history of the Steel Trust. The main 
purpose in forming that trust was to eliminate 
from the steel business the most efficient manu¬ 
facturer the world has ever known — Andrew 
Carnegie. The huge price paid for his company 
was merely the bribe required to induce him 
to refrain from exercising his extraordinary 
ability to make steel cheaply. Carnegie could 
make and sell steel several dollars a ton cheaper 
than any other concern. Because his com¬ 
petitors were unable to rise to his remarkable 
efficiency, his business career was killed; and 


TRUSTS AND EFFICIENCY 


209 


the American people were deprived of his ability 
— his genius — to produce steel cheaply. As 
the Stanley Investigating Committee found, 
the acquisition of the Carnegie Company by the 
promoters of the Steel Trust was “not the 
purchase of a mill , hut the retirement of a man .” 

That finding is amply sustained by the evi¬ 
dence. 

The commissioner of the Steel Plate Asso¬ 
ciation, Mr. Temple, testified: 

“They had to buy the Carnegie Steel Company. 
Mr. Carnegie, with his then plant and his organiza¬ 
tion and his natural resources, was in a position where 
he could dominate the entire situation; and had the 
United States Steel Corporation not have been formed 
about the time it was — some ten years ago — the 
steel business not only of America but of the world 
to-day would be dominated by Andrew Carnegie.” 

George W. Perkins, himself a director of the 
Steel Trust, through whose firm (J. P. Morgan 
& Co.) the bribe to Carnegie was paid, confirms 
Temple’s statement: 

“The situation was very critical. If the Steel 
Corporation had not been organized, or something 
had not been done to correct a very serious condition 
at that time, in my judgment by this time Mr. Car¬ 
negie would have personally owned the major part 
of the steel industry of this country. ...” 


210 BUSINESS — A PROFESSION 

And Herbert Knox Smith, Commissioner of 
Corporations, after elaborate investigation, de¬ 
clared : 

“The conclusion is inevitable, therefore, that the 
price paid for the Carnegie Company was largely 
determined by fear on the part of the organizers of 
the Steel Corporation of the competition of that con¬ 
cern. Mr. Carnegie’s name in the steel industry 
had been long synonymous with aggressive competi¬ 
tion, and there can be little doubt that the huge price 
paid for the Carnegie concern was, in considerable 
measure, for the specific purpose of eliminating a 
troublesome competitor, and Mr. Carnegie in partic¬ 
ular. This, it may be noted, was the interpretation 
generally placed upon the transaction in trade and 
financial circles at the time.” 

The price paid for the Carnegie. Company, 
about April i, 1901, was $492,006,160 in United 
States Steel Corporation securities — of the 
then market value of $447,416,640 in cash. 
The value of the actual assets of the Carnegie 
Company on December 31, 1899, as sworn to 
by Carnegie, had been only $75,610,104.06. 
The total assets of the concern on March 1, 
1900, as shown by the balance sheet, were only 
$101,416,802.43. And Commissioner Herbert 
Knox Smith, making a very generous estimate 
of the net value of the tangible assets of the 


TRUSTS AND EFFICIENCY 


211 


Carnegie Company on April i, 1901, fixes it at 
only $197,563,000. The bribe paid to elimi¬ 
nate Carnegie’s efficiency was thus at least 
$250,000,000. It was paid, as the Stanley Com¬ 
mittee finds, to prevent a contest “ between 
fabricators of steel and fabricators of securities; 
between makers of billets and of bonds.” It 
was paid to save the huge paper values which 
George W. Perkins and others had recently cre¬ 
ated by combining into eight grossly overcapital¬ 
ized corporations a large part of the steel mills of 
America. No wonder that J. P. Morgan & Co. 
were panic-stricken at the rumor that Carnegie 
was to build a tube mill which might reduce the 
cost of making tubes $10 a ton, when those 
bankers had recently combined seventeen tube 
mills (mostly old) of the aggregate value of 
$19,000,000, had capitalized them at $80,000,000 
and taken $20,000,000 of the securities for them¬ 
selves as promotion fees. The seven other simi¬ 
lar consolidations of steel plants floated about 
the same time had an aggregate capitalization 
of $437,825,800, of which $43,306,811 was 
taken by the promoters for their fees. 

As Commissioner Herbert Knox Smith re¬ 
ported to the President: 

“A steel war might have meant the sudden end of 
the extraordinary period of speculative activity and 


212 BUSINESS — A PROFESSION 

profit. On the other hand, an averting of this war, and 
the coalition of the various great consolidations, if 
successfully financed, would be a tremendous ‘bull* 
argument. It would afford its promoters an oppor¬ 
tunity for enormous stock-market profits through the 
sale of securities.” 

So Carnegie was eliminated, and efficiency in 
steel making was sacrificed in the interest of 
Wall Street; the United States Steel Corpora¬ 
tion was formed; and J. P. Morgan & Co. 
and their associates took for their services as 
promoters the additional sum of $62,500,000 
in cash values. 

THE SOURCES OF MOST PROFITS 

The second proposition — that conspicuous 
trust profits are due mainly to monopoly control 
of the market — is supported by abundant evi¬ 
dence equally conclusive. 

The Standard Oil Trust stood preeminent as 
an excessive profit taker. 

When Commissioner Herbert Knox Smith 
made his report to President Roosevelt in 1907, 
the trust had for a generation controlled about 
eighty-seven per cent of the oil business of 
America. It had throughout that period been 
managed by men of unusual ability. And yet 
Commissioner Smith reports: 


TRUSTS AND EFFICIENCY 213 

“The conclusion is, therefore, irresistible that the 
real source of the Standard’s power is not superior 
efficiency, but unfair and illegitimate practices. . . . 

“Considering all the branches of the oil industry to¬ 
gether, the difference in cost between the Standard 
and the independent concerns is not great. . . . 

“It is true, that taken as a whole, the Standard Oil 
Company is a more efficient industrial machine than 
any one of its competitors. Nevertheless, careful 
estimates based upon data submitted by a number 
of independent concerns as to the cost of pipe-line 
transportation, refining, and distributing oil, as com¬ 
pared with the Standard’s cost for these operations, 
indicate that the total difference in efficiency between 
the Standard and the independent concerns is not 
very great. . . . 

“The difference between the operating cost of a 
number of Standard refineries and a number of inde¬ 
pendent refineries was shown to be substantially 
nothing. It is possible, however, that some of the 
larger Standard refineries are able to reduce their costs 
a little further and that there may be some difference 
in the amount required for profit per gallon. The 
Standard may also be able to secure somewhat better 
yields from the crude. It is improbable, however, as 
already stated, that the superior efficiency of the 
Standard with respect to both refining costs and yields 
would on the average represent a difference of more 
than one-fourth of a cent a gallon. The outside fig¬ 
ure would be one-half cent per gallon. 

“It has been shown further that the difference in 
marketing costs between Standard and independent 
concerns in large cities is almost negligible. . . . 


214 


BUSINESS — A PROFESSION 


“As already stated, moreover, the argument, from 
a comparison between the costs of the Standard and 
the costs of the present independent concerns, does not 
fully show the fallacy of the Standard’s claim to 
have reduced prices by its superior efficiency. The 
present independent concerns are by no means so 
efficient as those which would have come into ex¬ 
istence in the absence of the restraints imposed by 
the monopolistic and unfair methods of the Stand¬ 
ard. Had the oil business continued to develop nor¬ 
mally, it is practically certain that there would have 
been in the United States to-day a limited number 
of large oil concerns, the efficiency of which would be 
considerably greater than that of the present inde¬ 
pendents.’’ 

Next to the Standard Oil, the Tobacco Trust 
is, perhaps, the most prominent of the excessive 
profit takers. A single one of its many con¬ 
stituent companies, W. Duke’s Sons & Co., 
“valued in 1885, under competition, at $250,- 
000,” yielded to its owners “up to 1908, in 
securities, dividends, and interest” $39,000,000, 
or 156 times the value of this particular busi¬ 
ness in 1885. In 1908 (the latest year reported 
on by Commissioner Herbert Knox Smith) the 
profits of the Tobacco Trust equalled 39.5 per 
cent of its total tangible assets. But there are 
many different departments of the tobacco 
business; and the rate of profit was by no 


TRUSTS AND EFFICIENCY 


215 


means the same in all in any one year. And in 
the same department the profits varied greatly 
during a series of years. In 1908, for instance, 
the profits of the cigar department were only 
4 per cent on the value of the tangible assets, 
while the profits of the subsidiary smoking 
tobacco companies were 103.5 P er cent the 
value of the tangible assets. What is the 
explanation of this great variation in profits? 
The company was efficiently managed. The 
same able men supervised all of the depart¬ 
ments. The same huge resources and trade 
influence were at the service of each of the de¬ 
partments. Commissioner Smith’s elaborate 
investigation solves the riddle. It brings out 
clearly the following features: 

“Very high rates of earnings on the actual invest¬ 
ment in most departments. 

“A marked coincidence of low rates of earnings and 
a low degree of control where the latter occurs. 

“A remarkable increase in the rates of earnings as 
the combination became more effective in its control.” 

In 1908, when the trust earned only 4 per 
cent on its cigar business, it controlled only 
about one-eighth of the cigar business of the 
country. When it earned 103.5 P er cent on its 
smoking tobacco subsidiaries, it controlled three- 


216 BUSINESS — A PROFESSION 

quarters of the smoking tobacco business of the 
country. 

“The most striking feature of the entire preced¬ 
ing discussion/’ says Commissioner Smith in conclud¬ 
ing, “is the almost invariable association of high 
rates of profit with a high degree of control, or with 
monopolistic conditions, and of lower rates of profit 
with a lesser degree of control or active competi¬ 
tion. . . . 

“ The combination’s ability to establish and main¬ 
tain prices without much regard to competition in 
the principal branches of the business, it may be 
repeated, is vividly illustrated by the fact that when 
the internal-revenue tax on tobacco was reduced in 
1901 and 1902, the combination maintained its prices 
at the level which had been established when the tax 
was increased some years earlier. As a result of this 
policy it appropriated practically the entire reduc¬ 
tion in the tax as additional profit in succeeding 
years.” 

That is the kind of efficiency in which trusts 
particularly excel. 

As to the Steel Trust’s extraordinary profits, 
the Stanley Investigating Committee finds: 

“The enormous earnings of the Steel Corporation 
are due not to a degree of integration or efficiency 
not possessed by its competitors, but to the owner¬ 
ship of ore reserves out of all proportion to its out¬ 
put or requirements, and to the control and operation 


TRUSTS AND EFFICIENCY 


217 


of common carriers, divisions of rates, and the liberal 
allowance obtained from other concerns through in¬ 
equitable and inordinate terminal allowances.” 

BUYING COMPETITORS 

The third proposition — that trusts are not 
efficient enough to hold their relative positions 
in the trade as compared with the independents 
without buying up successful competitors — 
is also supported by abundant evidence. 

The Steel Trust furnishes a striking example 
of this. Corporation Commissioner Herbert 
Knox Smith, reporting on the operations of the 
Steel Trust for the ten years following its for¬ 
mation (1901-10), says: 

“Notwithstanding the great additions made by 
the corporation to its properties from earnings, and 
the acquisition of several important competing con¬ 
cerns [including the Tennessee Coal and Iron Com¬ 
pany], its proportion of the business in nearly every 
important product, except pig iron and steel rails, 
is less than it was in 1901. . . . 

“This table shows that, whereas the Steel Corpora¬ 
tion in 1910 had fully maintained the share of the 
country’s total production of pig iron it held in 1901, 
its proportion of the production of nearly all steel prod¬ 
ucts had declined, and in most cases sharply de¬ 
clined. The only important exception was steel rails. 
The maintenance of its proportion here is chiefly 


£18 


BUSINESS — A PROFESSION 


due to the erection of a very large rail mill at the new 
Gary plant, and to the acquisition of the Tennessee 
Coal, Iron and Railroad Company, which had a con¬ 
siderable steel-rail production. 

“Taking the production of steel ingots and castings 
as a basis, it will be seen that the Steel Corporation’s 
percentage of the total fell from 65.7 per cent in 1901 
to 54.3 per cent in 1910. This figure, perhaps, is the 
best single criterion by which to judge the change in 
the corporation’s position in the steel industry from a 
producing standpoint. ... It should be noted that 
the decline in the production shown by this com¬ 
parison of 1901 and 1910 percentages was practically 
continuous for most products throughout the entire 
period.” 

That was the condition in 1910. A year 
later the Steel Trust’s proportion of the pro¬ 
duction of the country had fallen below fifty 
per cent. 

It may be doubted whether steel rails would 
have been an “exception” to the steady decline 
in the Steel Corporation’s proportion of the 
country’s business had it not been for the 
steel-rail pool and the close community of in¬ 
terest between the Steel Corporation and the 
railroads. As the Stanley Committee finds: 

“Of the $18,417,132,238 invested in railways in 
the United States, the directors of the Steel Corpo¬ 
ration have a voice in the directorates of or act 


TRUSTS AND EFFICIENCY 219 

as executive officers of railroad companies with a 
total capitalization and bonded indebtedness of 
$ 10 , 365 , 771 ,833.” 

The Sugar Trust, also, furnishes striking evi¬ 
dence of the inability of trusts to maintain their 
position in the trade without buying up suc¬ 
cessful competitors. In 1892, after acquiring 
the Spreckels Company of the West, the Sugar 
Trust alone produced ninety per cent of the sugar 
refined in this country. It had vast resources. 
It had strong political affiliations. It sought 
by every means, fair or foul, to maintain its 
control. It secured discriminating rates from 
railroads. It cheated the Government by false 
weights and undervaluation. With the bank¬ 
ers’ aid it crushed competitors through tricky 
control of credits. But in 1912 —at the end 
of twenty years of oppression — its own pro¬ 
duction of refined sugar had fallen to forty-two 
per cent of the country’s production. And, in 
spite of buying up from time to time stock in 
so-called independent cane sugar companies 
and beet sugar companies, it controlled in 1912 
(according to the statement of President Van 
Hise in “Concentration and Control”) only 
sixty-two per cent of this country’s production 
of refined sugar. 

The dominating position of the Tobacco Trust 


220 


BUSINESS — A PROFESSION 


was likewise maintained only through its policy 
of buying up competitors, as Corporation Com¬ 
missioner Herbert Knox Smith so clearly 
shows: 

“ Despite enormous expenditures for advertising 
and in ‘schemes/ and despite frequent price cutting 
by means of its so-called ‘fighting brands’ and its 
bogus independent concerns, there has been in sev¬ 
eral branches of the industry a constant tendency for 
competitors to gain business more rapidly than the 
combination, and thus to reduce its proportion of the 
output. This tendency has been overcome only by 
continued buying up of competitive concerns. Many 
weaker concerns have been virtually driven out of 
business or forced to sell out to the combination, either 
by reason of the direct competition of the latter, or 
as an indirect result of the vigorous competition be¬ 
tween the combination and larger independent con¬ 
cerns. In the case of the larger and more powerful 
concerns which it acquired, however, the combina¬ 
tion has usually secured control only by paying a high 
price. The immense profits of the combination have 
enabled it to keep up this policy. 

“This great disparity in size [between the factories 
of the combination and those of the independents] is 
not due to lack of enterprise or capital on the part of 
the independent concerns, but is essentially due to the 
constant transfer of the largest concerns from the 
ranks of the independents to those of the combi¬ 
nation. . . . 

“The output of individual concerns that remained 


TRUSTS AND EFFICIENCY 


221 


independent, however, has increased in most in¬ 
stances. The resultant tendency to increase the entire 
independent output was offset by the combination’s 
continued policy of buying up and absorbing the 
larger and more successful competitors.” 

Even the Standard Oil Trust, which relied 
mainly upon its control of the transportation 
systems and other methods of unfair competition 
to crush competitors, is shown by Commissioner 
Smith to have been unable to quite maintain 
its relative position in the market, despite its 
continued buying up of competitors. 

UNSUCCESSFUL TRUSTS 

Of the truth of the fourth proposition, stated 
above — that most of the trusts which did not 
secure monopolistic positions have failed to 
show marked success or efficiency as compared 
with the independent competing concerns —- 
every reader familiar with business must be 
able to supply evidence. Let him who doubts 
examine the stock quotations of long-estab¬ 
lished industrials and look particularly at the 
common stock which ordinarily represents the 
“expected economies’’ or “ efficiency” of com¬ 
bination. Take as examples: 

The Upper Leather Trust (American Hide 
and Leather Company — a combination of 


222 


BUSINESS — A PROFESSION 


twenty-one different concerns), with common 
at 534 and preferred at 26%. 

The Sole Leather Trust (Central Leather 
Company — a combination of over sixty tan¬ 
neries), with common at 26. 

The Paper Trust (International Paper Com¬ 
pany — a combination of twenty-three news 
mills), with common at 10. 

The Paper Bag Trust (Union Bag and Paper 
Company — a combination of seven different 
concerns), with common at 6^. 

The Writing Paper Trust (American Writing 
Paper Company — a combination of twenty- 
eight different concerns), with preferred at 2834 
and common at 3% — almost below the horizon 
of a quotation. 

But perhaps the most conspicuous industrial 
trust which was not able to secure control of the 
market is the International Mercantile Marine. 
That company had behind it the ability and re¬ 
sources of J. P. Morgan & Co., and their great 
influence with the railroads. It secured a work¬ 
ing agreement with the Hamburg American, the 
North German Lloyd and other companies; 
but it could not secure control of the Atlantic 
trade, and in the seven years since its organiza¬ 
tion has not paid a dividend on its $100,000,000 
of stock. Its common stands at 534 ? its pre- 


TRUSTS AND EFFICIENCY 


223 


ferred at i&%, and they stood little better be¬ 
fore the Titanic disaster. On the other hand, 
the $120,000,000 stock of the Pullman Com¬ 
pany, which has like influence with the rail¬ 
roads but succeeded in securing a monopoly, 
stands at 170%. 

Efficient or inefficient, every company which 
controls the market is a “money-maker.” No, 
the issue of “Competition versus Monopoly” 
cannot be distorted into the issue of “Small 
Concerns versus Large.” The unit in business 
may, of course, be too small to be efficient, and 
the larger unit has been a common incident of 
monopoly. But a unit too small for efficiency 
is by no means a necessary incident of competi¬ 
tion. And a unit too large to be efficient is no 
uncommon incident of monopoly. Man’s work 
often outruns the capacity of the individual 
man; and no matter how good the organization, 
the capacity of an individual man usually de¬ 
termines the success or failure of a particular 
enterprise — not only financially to the owners 
but in service to the community. Organiza¬ 
tion can do much to make concerns more effi¬ 
cient. Organization can do much to make larger 
units possible and profitable. But the efficacy 
even of organization has its bounds. There is 
a point where the centrifugal force necessarily 


224 


BUSINESS — A PROFESSION 


exceeds the centripetal. And organization can 
never supply the combined judgment, initiative, 
enterprise and authority which must come from 
the chief executive officer. Nature sets a limit 
to his possible achievement. 

As the Germans say: “Care is taken that 
the trees do not scrape the skies.” 


TRUSTS AND THE EXPORT TRADE 1 


Progressive Party advocates of legalizing 
industrial monopolies urge as a reason the ne¬ 
cessities of the export trade. “How can we,” 
say they, “compete with small concerns against 
England and Germany for the commerce of 
the world?” 

The answer is not difficult. There is no such 
alternative as “monopoly or the small concern.” 
America has to-day, in all lines of competitive 
business, concerns large enough to be the most 
efficient instruments of commerce, be it foreign 
or domestic. With America’s abundant capital 
and the ambition of its citizens, there will be no 
lack of “bigness” in industry. We need not 
legalize monopoly in order to equip ourselves for 
the foreign trade. 

A survey of the relations of our leading trusts 
to the export trade should dispel the belief that 
we are particularly indebted to them either for 
the quantity or character of their foreign 
business. 

1 Published in “Collier’s Weekly,” September 21,1912. 


226 


BUSINESS — A PROFESSION 


STEEL 

First. Take the exports of steel — the crude 
products in which the Steel Trust deals. George 
W. Perkins, so prominent as promoter and 
director of that corporation, gravely told the 
Senate Committee: “We have been infinitely 
more successful in expanding our foreign trade 
than would have been possible under competi¬ 
tive conditions.” But the facts show that the 
organization of the Steel Trust arrested the 
development of the American export trade in 
steel. Our cost of production rose, while that 
of European steel makers remained station¬ 
ary and they gained the world’s growing 
trade. 

The Steel Trust was organized April i, 1901. 
During the ten years, 1901 to 1910, our exports 
of crude steel and iron products increased from 
1,154,000 to 1,533,000 tons, or 33 per cent; 
Great Britain’s from 3,213,000 to 4,594,000, or 
43 per cent; Germany’s from 838,000 to 4,868,- 
000, or 480 per cent. In other words, America 
had in 1901, as compared with England and 
Germany, nearly 22 per cent of the world’s ex¬ 
port tonnage. In 1910 America had less than 
13 per cent. During these ten years coincident 
with the existence of the Steel Trust, America 


TRUSTS AND THE EXPORT TRADE 227 

lost steadily in prestige in the world’s steel 
market. 

As stated by Mr. T. Good in his able discus¬ 
sion of the subject: 

“From the moment that the Steel Trust got to 
work the American iron and steel industry was di¬ 
verted from natural to unnatural developments. 
Costs and prices of raw material were inflated; 
progress toward economy was arrested; retrogres¬ 
sion set in and America’s rosy chances of annexing 
the world’s export trade were shattered. ... It is, 
indeed, a demonstrable fact that the trust has done 
more harm than good from an American point of view; 
that it has burdened and handicapped the American 
steel trade, and incidentally given Britain, Germany 
and other countries better chances in the race. Last 
year, 1910, the British iron and steel exports were 
further in advance of those of America than they 
were in 1900, the year before the Steel Trust got down 
to business; while German exports, which were 
about thirty per cent below those of the United 
States in 1900, are now something like three hundred 
per cent above them.” 

And the Steel Trust’s foreign sales were no 
more satisfactory in character than in quantity. 
Export prices were almost uniformly lower than 
domestic prices, and in some instances the ad¬ 
vantage given foreign consumers was surpris¬ 
ingly large, the five-year average being, as the 


228 


BUSINESS — A PROFESSION 


Stanley Committee shows, for steel rails about 
$4 a ton, for structural shapes over $5 a ton, 
and for tin plates over $14.50 a ton. 

Steel Trust officials endeavor to meet this 
damaging evidence and to support their asser¬ 
tion that the trust has benefited our export 
trade by presenting the following facts: (1) The 
trust exports more steel than its constituent 
companies did before the trust was organized. 
(2) The trust’s percentage of the total crude 
steel exports of the country, as compared with 
the independents, has risen greatly and now 
amounts to ninety-five per cent of the total ex¬ 
ports of that character. (3) The trust’s exports 
increased largely in 1911 over 1910. 

The facts adduced by the trust’s officials, 
rightly interpreted, tend rather to disprove 
than to prove their contention. The reason 
why America lost its prestige in the world’s 
steel trade was the huge increase in the cost of 
producing steel in America. That increased 
cost was due particularly to the increased cost 
of producing pig iron. And for the increased 
cost of pig iron the organization of the Steel 
Trust is in large part responsible. That increase 
cost drove the independents out of the foreign 
market where prices are competitive; and they 
necessarily confined themselves to the domestic 


TRUSTS AND THE EXPORT TRADE 229 


market where prices were maintained through 
Gary dinners. The Steel Trust could still sell 
abroad, because its ownership of transporta¬ 
tion systems gave them an unfair advantage 
over the independents. The trust was perhaps 
driven to sell some of its product abroad, be¬ 
cause the independents made such heavy in¬ 
roads upon the trust’s percentage of the domes¬ 
tic business — reducing it from over sixty per 
cent in 1901 to less than fifty per cent in 1911. 

The large increase of exports of the trust in 
1911 was due, in part, to the sharp fall in the 
selling price of steel in the United States during 
that year. And the price fell, doubtless, not 
so much because of lessened demand as be¬ 
cause the Stanley Committee investigation led 
to the discontinuance of the Gary dinners. 

America may well take pride in her large ex¬ 
ports of iron and steel products. In 1910 they 
amounted to $201,271,903; in 1911 to $249,- 
656,411. But it is the highly manufactured 
iron and steel products, made largely under 
competitive conditions, like tools and machinery, 
to which these large totals are mainly due. 
The Steel Trust’s exports in 1910 amounted 
(as the Stanley Committee finds) to only $41,- 
586,950. Machinery and machines rose from 
$50,897,390 in 1902 to $111,135,833 in 1911. 


230 


BUSINESS —A PROFESSION 


The growth of exports in highly manufactured 
iron and steel products is the more remarkable 
in view of the handicap to which our manu¬ 
factures are subjected through the Steel Trust 
by the high prices for crude steel products. 

Furthermore, the Steel Trust claims to supply 
ninety-five per cent of our crude steel exports. If 
the formation of trusts advances the export trade, 
why have we fallen behind Germany and Eng¬ 
land in steel exports? Surely they have no steel 
trusts comparable with the Steel Corporation 
in size or resources. 

Progressive Party advocates of monopoly have 
the habit of attributing the commercial develop¬ 
ment of Germany largely to the size of their in¬ 
dustrial units and to the legalization of mo¬ 
nopolies; but they misread the facts. 

One of the largest and most successful of the 
German cartels is that of the steel producers, con¬ 
trolling ninety-five per cent of the country’s pro¬ 
duction — as our Steel Trust controls ninety-five 
per cent of this country’s crude steel exports. The 
German Trust consists of thirty-six separate con¬ 
cerns. Their aggregate capital is a little over 
1,250,000,000 marks, or $312,000,000 — much 
less than one-fourth of the capitalization of the 
United States Steel Corporation, which, includ¬ 
ing underlying bonds and outstanding securities 


TRUSTS AND THE EXPORT TRADE 231 

of subsidiary companies, is found by the Stanley 
Committee to be $1,465,555,819. The average 
capital of each of those thirty-six German con¬ 
cerns is less than $10,000,000; and probably not 
one of them has a capital as large as some of our 
so-called independents; for the Lackawanna 
Steel Company has a capitalization in bonds 
and stocks of $145,412,000; the Republic Iron 
& Steel Co., $70,630,000; the Cambria Steel 
Company, $59,468,000; the Jones & Laughlin 
Steel Company, $54,487,000; and the Bethle¬ 
hem Steel Company, $66,336,000. 

Furthermore, each one of those thirty-six 
German concerns, which are federated for cer¬ 
tain purposes, are free and independent in other 
respects. They are restricted as to selling price 
and quantity of production (these being fixed 
by the syndicate), but they are absolutely inde¬ 
pendent as to internal management. The syndi¬ 
cate exercises no control whatever as to meth¬ 
ods and processes of manufacture, or over the 
method of securing raw material by the individ¬ 
ual members, or with their labor policy. Fur¬ 
thermore, the limited quota assigned to each 
member relates exclusively to products made 
for sale. Any member may use as much steel 
and iron as he pleases in his own factories; that 
is, may work up into more highly manufac- 


232 


BUSINESS —A PROFESSION 


tured goods the crude steel products to which 
alone the cartel restrictions apply. The Ger¬ 
man Steel Trust preserved competition in large 
part among its constituent concerns. The 
United States Steel Trust destroyed competi¬ 
tion among its constituent concerns. This 
greater freedom for individual action, coupled 
with the fact that the thirty-six concerns are 
separately owned, and that the combination 
agreement is for a limited term only, may 
account, in large part, for the fact that, in 
Germany, the cost of producing iron and steel 
is no higher than it was ten or twelve years 
ago, while the American cost of production 
has risen greatly. 

How groundless, in the light of these facts, is 
the contention made by Mr. George W. Perkins, 
before the Senate Committee on Interstate 
Commerce, that the Steel Trust must be pre¬ 
served to put us on a par with Germany: 

“Suppose/’ asked Senator Newlands, “the steel 
company were divided to-day into ten corporations of 
$150,000,000 each, instead of being organized into 
one corporation having nearly a billion and a half of 
capital. Do you not think that each one of those units 
could be as efficient in business and in all the econo¬ 
mies as the total aggregation in one corporation?” 

“Not as efficient,” answered Mr. Perkins. “If I 
were asked to put my finger on one disadvantage 


TRUSTS AND THE EXPORT TRADE 233 


greater than the other, it would be its effect on the 
foreign trade. You take ten such companies and go 
out and compete with Germany. It is self-evident 
that we could not begin to do it as effectively as with 
one large company.” 

But the ultimate success even, of the German 
competitive system of combinations is by no 
means assured. Although a very wide field of 
competitive endeavor is left open and the incen¬ 
tive of separate ownership is preserved, the 
evils of combination appear not to have been 
entirely avoided. The steel and iron cartel was 
not formed until 1904; but already (as the 
statement quoted by President Van Hise in his 
“Concentration and Control” shows) grave 
difficulties are manifesting themselves: 

“It is feared that the organization of the steel in¬ 
dustry in the form of the steel combine will result in 
a gradual deterioration in the quality of steel prod¬ 
ucts and that the chief object of the combine will 
become quantity rather than quality. 

“It is maintained that the wishes of customers are 
not given due consideration; that they are compelled 
to take the quality of steel which the combine sees fit 
to give them, regardless of the special needs of their 
business; . . . that it is difficult for the manufacturer 
to secure as uniform a grade of goods as he had been 
able to obtain when he bought all his steel from the 
same firm. . . . 


234 


BUSINESS —A PROFESSION 


“The combine has . . . secured gradually increas¬ 
ing prices. . . . 

“It is also asserted that ... it has been possible 
for the cartel to shift the burden more and more upon 
the less organized manufacturers who use steel prod¬ 
ucts as raw materials. Consequently the last and 
unorganized stages of steel products manufacture — 
e. g., machine-making, etc. — have been forced to 
bear the greater proportion of the burden caused by 
a gradual increase in prices. These manufacturers 
will undoubtedly be able to shift a part of the burden 
upon the final consumer. . . .” 

It is notable that the combination sells steel 
abroad lower than at home;' in some cases as 
much as twenty per cent cheaper, following 
the same policy as the United States Steel 
Corporation. 

“The manufacturing interests claim, and appar¬ 
ently with good grounds, that the export policy of the 
steel combine will in the long run prove disastrous to 
the exports of the German machine industries. 
Whenever the home market is unable to absorb the 
amount of steel that the producers place akthe syndi¬ 
cate’s disposal, it is generally forced to reduce its 
price to foreign buyers in order to get rid of the out¬ 
put. In this way the foreign manufacturer of ma¬ 
chines, by obtaining his raw material from the Ger¬ 
man combine, is placed in an unduly advantageous 
position in competing with the German producer. 
In 1904, for example, pig iron was sold abroad at 


TRUSTS AND THE EXPORT TRADE 235 


from 69 to 70 marks, whereas the domestic buyer was 
forced to pay from 82^ to 92}^. . . . 

“ Generally the larger and more powerful members 
have benefited more than the weaker ones, through 
its activity; and in some cases the condition of the 
weaker members has deteriorated rather than im¬ 
proved. While some companies have undoubtedly 
been able to remain in existence as a result of the syn¬ 
dicate’s activity that would under the competitive 
system have been forced to the wall, others that might 
have developed under the competitive system have 
been held back by the cartel’s policy of combination.” 

Has n’t all that a very familiar sound? 
“Gradually increasing prices ,, ; “shifting the 
burden upon the ultimate consumer”; “sell¬ 
ing cheaper abroad than at home.” Verily, if 
the tariff is not the “Mother of the Trusts,” 
the attendant abuses are at least akin. 

OIL 

Second. Take next the export of mineral oil 
and oil products — a very important item in 
our exports. In 1911 it amounted in value to 
$105,922,848, or about one-twentieth of our 
total exports. The exports are, also, a very 
important part of America’s oil trade, as we 
have customarily exported more than one-half of 
all the illuminating oil produced in the country. 
For more than a generation the Standard Oil 


236 


BUSINESS — A PROFESSION 


Company dominated the American oil trade, 
having in recent years about eighty-six per cent of 
the business of the country. That company stood 
preeminent among American trusts in age, in 
power, in resources, in perfection of organiza¬ 
tion, and in ability of management. Through 
the unfair use of that power, ability and organi¬ 
zation it prevented the rise of any large Ameri¬ 
can competitor. If great size and monopoly 
powers gave peculiar advantages to Americans 
for developing export trade, surely the Standard 
should have conquered for us the oil trade of 
the world; but Corporation Commissioner 
Herbert Knox Smith showed that, though our 
oil exports grew largely, we lost during the 
reign of the Standard Oil our relative position 
in the world’s market, adding: 

“More than half the illuminating oil produced in 
this country is exported. The exportation of naphtha, 
lubricating oils, paraffin, wax and candles made from 
wax is also considerable. This country is, however, 
to-day a comparatively less important factor in the 
petroleum markets of the world than it was twenty or 
thirty years ago.” 

And Commissioner Herbert Knox Smith also 
shows that the Standard Oil Company did not 
succeed in acquiring any larger part of the 


TRUSTS AND THE EXPORT TRADE 237 

foreign trade than it did of the domestic, the 
percentage in each being about eighty-seven 
per cent of the whole, saying: 

“The percentage of export trade in illuminating 
oil handled or controlled by the Standard Oil Com¬ 
pany, therefore, is substantially the same as the pro¬ 
portion of its production.” 

And, like the Steel Trust, the Standard Oil 
was persistently selling its product much cheaper 
abroad than in America, imposing extra burdens 
upon the American consumer to compensate 
for any possible losses in the foreign trade, as 
Commissioner Herbert Knox Smith so clearly 
shows: 

“The preceding analysis of the price policy of the 
Standard Oil Company in the export trade during 
recent years, as compared with its price policy in the 
domestic trade, shows two conspicuous facts. In the 
first place, while the prices of illuminating oil in the 
principal foreign markets have for years been rela¬ 
tively lower than the prices in the United States, this 
disparity became especially conspicuous during the 
years 1903, 1904 and 1905. During those years the 
domestic prices stood at a much higher level than for 
many years before, while prices in the principal foreign 
markets, like the United Kingdom, Germany and 
the Orient, stood at times from two to three cents 
below the average price in the United States, trans- 


238 


BUSINESS —A PROFESSION 


portation costs, difference in quality of oil, etc., being 
taken into account. 

“In the second place, the investigation shows that 
the decrease in prices in the foreign trade, during the 
years 1903-1905, was not due to an oversupply of 
American oil or the oil from all sources combined, but 
was due particularly to an attack by the Standard 
Oil Company upon certain new and threatening 
competitors. Aside from other proofs, conclusive evi¬ 
dence that there was no oversupply of American oil, as 
well as evidence that the Standard’s policy has been 
to promote its own interests rather than those of the 
United States, is found in the Standard’s extensive 
purchases of Russian oil during these years and its 
acquisition of crude-oil land and refineries in foreign 
countries.” 

President Van Hise, in his “ Concentration 
and Control,” mentions that in 1905 the United 
States was taken into the International Steel 
Rail Syndicate, and also says: 

“Oil is one of the businesses in which the inter¬ 
national combination and co-operation have gone far, 
in some cases there being union, in others division, 
of territory.” 

Possibly these facts may furnish a partial ex¬ 
planation of America’s falling prestige in the 
foreign steel and oil trades. Was the foreign 
market sacrificed to avoid competition by the 
foreigners in the domestic market? 


TRUSTS AND THE EXPORT TRADE 239 


TOBACCO 

Third. Tobacco presents a field where an im¬ 
portant foreign market was deliberately sacri¬ 
ficed by the dominating trust in order to pro¬ 
tect itself from foreign competition in the home 
market. Tobacco products are among our 
leading manufactures, but our exports of man¬ 
ufactured tobacco products are, as Commis¬ 
sioner Herbert Knox Smith reports, “com¬ 
paratively insignificant.” 

“The exports in 1908 amounted to $5,550,695, or 
less than two per cent of the value of our manufac¬ 
tures of tobacco. ... [In 1911 they amounted to 
only $4,677,859.] 

“The existence of governmental monopolies of 
tobacco manufactures in a number of leading coun¬ 
tries and of prohibitive tariffs on the importation of 
manufactured tobacco in other countries prevents 
any considerable development in international trade 
in such products.” 

The Tobacco Trust, which acquired control 
of the greater part of what little of the ex¬ 
port trade America had, deliberately closed the 
door to any exports by it to Great Britain or 
Ireland. In consideration of the powerful 
British trust (the Imperial) agreeing not to 
carry on business in manufactured tobaccos in 


£40 


BUSINESS —A PROFESSION 


the United States, the Tobacco Trust, and its 
active directors individually, agreed that they 
would not thereafter, directly or indirectly, 
carry on business in Great Britain or Ireland. 

WHY EXPORTS GROW 

Trusts have, of course, contributed to our ex¬ 
port trade, as have many independent manu¬ 
facturers. Some of these trust contributions 
have been large; but the great increase in our 
exports of manufactures is not due to the ex¬ 
istence of trusts. Increased exports have been 
quite as marked in other lines as in trust-made 
goods. We hear particularly of the Harvester 
Trust’s export business; and it is true that this 
country’s exports in agricultural implements 
doubled in ten years — 1902 to 1911. But in 
many long-established and highly competitive 
lines of manufacture, like special lines of ma¬ 
chinery and of tools, the 19 n exports were not 
only double but threefold those of 1902; and in 
other new and highly competitive businesses the 
increases were much greater. For instance, the 
1911 exports of automobiles were twenty times 
as large as those of 1902; the 1912 exports 
nearly thirty times as large. The fact is we 
have become a great manufacturing people. In 
the year ending June 30, 1912, our exports of 


TRUSTS AND THE EXPORT TRADE 241 

manufactured products exceeded $1,000,000,000. 
American manufactures have been developed 
through initiative, enterprise, energy and am¬ 
bition — all common characteristics of com¬ 
petitive business. The trusts had, of course, a 
part in securing these foreign markets; and 
have enjoyed, perhaps, a still larger share of 
their fruits by exploiting foreign markets in 
which independent manufacturers had been the 
pioneers. 

But the trusts have not been the cause of our 
heavy export business; nor are they essential to 
its continuance or future development. And 
it should be borne in mind that the great 
trusts carry, in their huge resources and the 
volume of their business, also an element of dan¬ 
ger to our export trade. Many of them have 
already established factories in foreign coun¬ 
tries from which they supply a part, at least, of 
their foreign trade. This is true of the Stand¬ 
ard Oil Company, of the Harvester Company, 
of the Shoe Machinery Company and of many 
others. The establishment of these foreign fac¬ 
tories has been due, in large measure, to the 
existence of foreign tariffs or to the require¬ 
ments of foreign patent laws. But it has been 
due, in part, also to a lower cost of production 
abroad, resulting from the lower wages paid 


242 BUSINESS —A PROFESSION 

there. We have been able, in many lines, to 
produce goods at lower cost in America than 
foreigners do abroad, in spite of paying higher 
wages; because of greater superiority in man¬ 
agement or the introduction of advanced ma¬ 
chinery and labor-saving devices. But is it 
not possible that our able business managers, 
transferring to foreign countries American busi¬ 
ness organization, machinery and methods, may 
be able to produce with low-priced foreign 
labor goods for the foreign trade more cheaply 
abroad than at home? And, in such event, 
would they not be led to develop their foreign 
factories instead of those at home, and the ex¬ 
port trade suffer accordingly? Such a course 
might bring great gains to the American capi¬ 
talists, who are the stockholders of the trusts; 
but the American workingmen would lose. 

Has not our export trade more to lose than 
to gain through the legalization of monopolies? 


COMPETITION THAT KILLS 1 


“I cannot believe,” said Mr. Justice Holmes, 
“that in the long run the public will profit by 
this course, permitting knaves to cut reasonable 
prices for mere ulterior purposes of their own, 
and thus to impair, if not destroy, the produc¬ 
tion and the sale of articles which it is assumed 
to be desirable the people should be able to get.” 

Such was the dissent registered by this for¬ 
ward-looking judge when, two years ago, the 
Supreme Court of the United States declared 
invalid contracts by which a manufacturer of 
trade-marked goods sought to prevent retailers 
from cutting the price he had established. 2 
Shortly before, the court had held that mere 
possession of a copyright did not give the 
maker of an article power to fix by notice the 
price at which it should be sold to the consumer. 3 
And now the court, by a five-to-four decision, 
has applied the same rule to patented articles, 
thus dealing a third blow at the practice of 

1 Published in “Harper’s Weekly,” November 15, 1913. 

2 Dr. Miles Medical Co. vs. Park & Sons Co., 220 U. S. 409. 

* Bobbs-Merrill Co. vs. Straus, 210 U. S. 339. 


244 


BUSINESS — A PROFESSION 


retailing nationally advertised goods at a uni¬ 
form price throughout the country. 1 

Primitive barter was a contest of wits instead 
of an exchange of ascertained values. It was, 
indeed, an equation of two unknown quantities. 
Trading took its first great advance when 
money was adopted as the medium of exchange. 
That removed one-half of the uncertainty in¬ 
cident to a trade; but only one-half. The 
transaction of buying and selling remained still 
a contest of wits. The seller still gave as little 
in value and got as much in money as he could. 
And the law looked on at the contest, declaring 
solemnly and ominously: “Let the buyer be¬ 
ware.” Within ample limits the seller might 
legally lie with impunity; and, almost without 
limits, he might legally deceive by silence. The 
law gave no redress because it deemed reliance 
upon sellers’ talk unreasonable; and not to dis¬ 
cover for one’s self the defects in an article pur¬ 
chased was ordinarily proof of negligence. A 
good bargain meant a transaction in which one 
person got the better of another. Trading in 
the “good old days” imposed upon the seller 
no obligation either to tell the truth, or to give 
value or to treat all customers alike. But in 
the last generation trade morals have made 

1 Bauer vs. O’Donnell, 229 U. S. 1. 


COMPETITION THAT KILLS 245 

great strides. New methods essential to doing 
business on a large scale were introduced. They 
are time-saving and labor-saving; and have 
proved also conscience-saving devices. 

The greatest progress in this respect has been 
made in the retail trade; and the first impor¬ 
tant step was the introduction of the one-price 
store. That eliminated the constant haggling 
about prices, and the unjust discrimination 
among customers. But it did far more. It 
tended to secure fair prices; for it compelled 
the dealer to make, deliberately, prices by which 
he was prepared to stand or fall. It involved a 
publicity of prices which invited a comparison 
in detail with those of competitors; and it sub¬ 
jected all his prices to the criticism of all his cus¬ 
tomers. But while the one-price store marked 
a great advance, it did not bring the full assur¬ 
ance that the seller was giving value. The day’s 
price of the article offered was fixed and every 
customer was treated alike; but there was still 
no adequate guarantee of value, both because 
there was ordinarily no recognized standard of 
quality for the particular article, and because 
there was no standard price even for the article 
of standard quality. 

Under such conditions the purchaser had still 
to rely for protection on his own acumen, or on 


246 BUSINESS — A PROFESSION 

the character and judgment of the retailer; and 
the individual producer had little encourage¬ 
ment to establish or to maintain a reputation. 
The unscrupulous or unskilful dealer might be 
led to abandon his goods for cheaper and in¬ 
ferior substitutes. This ever-present danger 
led to an ever-widening use of trade-marks. 
Thereby the producer secured the reward for 
well-doing and the consumer the desired guar¬ 
antee of quality. Later the sale of trade- 
marked goods at retail in original packages 
supplied a further assurance of quality, and also 
the assurance that the proper quantity was de¬ 
livered. The enactment of the Federal Pure 
Food law and similar State legislation 
strengthened these guarantees. 

But the standard of value in retail trade was 
not fully secured until a method was devised 
by which a uniform retail selling price was estab¬ 
lished for trade-marked articles sold in the 
original package. In that way, widely extended 
use of a trade-marked article fostered by na¬ 
tional advertising could create both a reputa¬ 
tion for the article and a common knowledge 
of its established selling price or value. With 
the introduction of that device the evolution 
of the modern purchase became complete. The 
ordinary retail sale — the transaction which had 


COMPETITION THAT KILLS 247 

once been an equation of two unknown quanti¬ 
ties — became an equation of two known 
quantities. Uncertainty in trade is eliminated 
by “A Dollar and the Ingersoll Watch,” or 
“Five cents and the Uneeda Biscuits.” 

THE COURT'S PROHIBITION 

Such is the one-price system to which the 
United States Supreme Court denied its sanc¬ 
tion. The courts of Great Britain had recog¬ 
nized this method of marketing goods as legal. 
The Supreme Court of Massachusetts and that 
of California had approved it. The system was 
introduced into America many years ago, and 
has become widely extended. To abandon it now 
would disturb many lines of business and seri¬ 
ously impair the prosperity of many concerns. 

When the United States Supreme Court de¬ 
nied to makers of copyrighted or patented goods 
the power to fix by notice the prices at which the 
goods should be retailed, the court merely in¬ 
terpreted the patent and copyright acts and de¬ 
clared that they do not confer any such special 
privilege. But when the court denied the valid¬ 
ity of contracts for price-maintenance of trade- 
marked goods, it decided a very different matter. 
It did not rest its decision mainly upon the 
interpretation of a statute; for there is no stat- 


BUSINESS —A PROFESSION 


248 

ute which in terms prohibits price-maintenance, 
or, indeed, deals directly with the subject. It 
did not refuse to grant a special privilege to 
certain manufacturers; it denied a common 
right to all producers. Nor does the decision of 
the court proceed upon any fundamental or 
technical rule of law. The decision rests mainly 
upon general reasoning as to public policy; and 
that reasoning is largely from analogy. 

THE DEMANDS OF PUBLIC POLICY 

When a court decides a case upon grounds of 
public policy, the judges become, in effect, leg¬ 
islators. The question then involved is no longer 
one for lawyers only. It seems fitting, there¬ 
fore, to inquire whether this judicial legislation 
is sound — whether the common trade practice 
of maintaining the price of trade-marked arti¬ 
cles has been justly condemned. And when 
making that inquiry we may well bear in mind 
this admonition of Sir George Jessel, a very wise 
English judge: 

“If there is one thing which more than any other 
public policy requires, it is that men of full age and 
competent understanding shall have the utmost 
liberty of contracting, and that their contracts, when 
entered into freely and voluntarily, shall be held 
sacred, and shall be enforced by courts of justice. 


COMPETITION THAT KILLS 


£49 


Therefore, you have this paramount public policy to 
consider, that you are not lightly to interfere with 
this freedom of contract.” 

THE court’s OBJECTION 

The Supreme Court says that a contract by 
which a producer binds a retailer to maintain 
the established selling price of his trade-marked 
product is void; because it prevents competition 
between retailers of the article and restrains 
trade. 

Such a contract does, in a way, limit compe¬ 
tition; but no man is bound to compete with 
himself. And when the same trade-marked 
article is sold in the same market by one dealer 
at a less price than by another, the producer, in 
effect, competes with himself. To avoid such 
competition, the producer of a trade-marked 
article often sells it to but a single dealer in a 
city or town; or he establishes an exclusive 
sales agency. No one has questioned the legal 
right of an independent producer to create such 
exclusive outlets for his product. But if ex¬ 
clusive selling agencies are legal, why should 
the individual manufacturer of a trade-marked 
article be prevented from establishing a mar¬ 
keting system under which his several agencies 
for distribution will sell at the same price? 


250 


BUSINESS —A PROFESSION 


There is no difference, in substance, between an 
agent who retails the article and a dealer who 
retails it. 

For many business concerns the policy of 
maintaining a standard price for a standard ar¬ 
ticle is simple. The village baker readily main¬ 
tained the quality and price of his product, by 
sale and delivery over his own counter. The 
great Standard Oil monopoly maintains quality 
and price (when it desires so to do) by selling 
throughout the world to the retailer or the con¬ 
sumer from its own tank-wagons. But for most 
producers the jobber and the retailer are the 
necessary means of distribution—as necessary 
as the railroad, the express or the parcel post. 
The Standard Oil Company can, without enter¬ 
ing into contracts with dealers, maintain the 
price through its dominant power. Shall the 
law discriminate against the lesser concerns 
which have not that power, and deny them the 
legal right to contract with dealers to accomplish 
a like result? For in order to insure to the 
small producer the ability to maintain the 
price of his product, the law must afford him 
contract protection, when he deals through 
the middleman. 

But the Supreme Court says that a contract 
which prevents a dealer of trade-marked arti- 


COMPETITION THAT KILLS 


251 


cles from cutting the established selling price, 
restrains trade. In a sense every contract re¬ 
strains trade; for after one has entered into a 
contract, he is not as free in trading as he was 
before he bound himself. But the right to bind 
one’s self is essential to trade development. And 
it is not every contract in restraint of trade, 
but only contracts unreasonably in restraint of 
trade, which are invalid. Whether a contract 
does unreasonably restrain trade is not to be 
determined by abstract reasoning. Facts only 
can be safely relied upon to teach us whether 
a trade practice is consistent with the general 
welfare. And abundant experience establishes 
that the one-price system, which marks so im¬ 
portant an advance in the ethics of trade, has 
also greatly increased the efficiency of merchan¬ 
dising, not only for the producer, but for the 
dealer and the consumer as well. 

THE PRODUCER’S PLEA 

If a dealer is selling unknown goods or goods 
under his own name, he alone should set the 
price; but when a dealer has to use somebody 
else’s name or brand in order to sell goods, then 
the owner of that name or brand has an interest 
which should be respected. The transaction is 
essentially one between the two principals — 


252 


BUSINESS —A PROFESSION 


the maker and the user. All others are middle¬ 
men or agents; for the product is not really 
sold until it has been bought by the consumer. 
Why should one middleman have the power to 
depreciate in the public mind the value of the 
maker’s brand and render it unprofitable not 
only for the maker but for other middlemen? 
Why should one middleman be allowed to in¬ 
dulge in a practice of price-cutting, which tends 
to drive the maker’s goods out of the market 
and in the end interferes with people getting 
the goods at all? 

CUT PRICES A MISLEADER 

When a trade-marked article is advertised to 
be sold at less than the standard price, it is gen¬ 
erally done to attract persons to the particular 
store by the offer of an obviously extraordinary 
bargain. It is a bait — called by the dealers 
a “leader.” But the cut-price article would 
more appropriately be termed a “ mis-leader ”; 
because ordinarily the very purpose of the cut- 
price is to create a false impression. 

The dealer who sells the Dollar Ingersoll 
watch for sixty-seven cents necessarily loses 
money in that particular transaction. He has 
no desire to sell any article on which he must 
lose money. He advertises the sale partly to 


COMPETITION THAT KILLS 


253 


attract customers to his store; but mainly to 
create in the minds of those customers the false 
impression that other articles in which he deals 
and which are not of a standard or known value 
will be sold upon like favorable terms. The 
customer is expected to believe that if an Inger- 
soll watch is sold at thirty-three and one-third 
per cent less than others charge for it, a ready- 
to-wear suit or a gold ring will be sold as cheap. 
The more successful the individual producer of 
a trade-marked article has been in creating for 
it a recognized value as well as a wide sale, the 
greater is the temptation to the unscrupulous to 
cut the price. Indeed a cut-price article can 
ordinarily be effective as a “mis-leader” only 
when both the merits and the established selling 
price are widely known. 

HOW CUT PRICES HURT 

The evil results of price-cutting are far- 
reaching. It is sometimes urged that price- 
cutting of a trade-marked article injures no 
one; that the producer is not injured, since he 
received his full price in the original sale to 
jobber or retailer; and indeed may be bene¬ 
fited by increased sales, since lower prices 
ordinarily stimulate trade; that the retailer 
cannot be harmed, since he has cut the price 


254 BUSINESS —A PROFESSION 

voluntarily to advance his own interests; that 
the consumer is surely benefited because he gets 
the article cheaper. But this reasoning is most 
superficial and misleading. 

To sell a Dollar Ingersoll watch for sixty- 
seven cents injures both the manufacturer and 
the regular dealer; because it tends to make 
the public believe that either the manufac¬ 
turer’s or the dealer’s profits are ordinarily 
exorbitant; or, in other words, that the watch 
is not worth a dollar. Such a cut necessarily 
impairs the reputation of the article, and, by 
impairing reputation, lessens the demand. It 
may even destroy the manufacturer’s market. 
A few conspicuous “cut-price sales” in any 
market will demoralize the trade of the regular 
dealers in that article. They cannot sell it at 
cut prices without losing money. They might 
be able to sell a few of the articles at the estab¬ 
lished price; but they would do so at the risk to 
their own reputations. The cut by others, if 
known, would create the impression on their 
own customers of having been overcharged. 
It is better policy for the regular dealer to drop 
the line altogether. On the other hand, the 
demand for the article from the irregular dealer 
who cuts the price is short-lived. The cut- 
price article cannot long remain his “leader.” 


COMPETITION THAT KILLS 255 

His use for it is sporadic and temporary. One 
“leader” is soon discarded for another. Then 
the cut-price outlet is closed to the producer; 
and, meanwhile, the regular trade has been lost. 
Thus a single prominent price-cutter can ruin a 
market for both the producer and the regular 
retailer. And the loss to the retailer is serious. 

On the other hand, the consumer’s gain from 
price-cutting is only sporadic and temporary. 
The few who buy a standard article for less than 
its value do benefit — unless they have, at the 
same time, been misled into buying some other 
article at more than its value. But the public 
generally is the loser; and the losses are often 
permanent. If the price-cutting is not stayed, 
and the manufacturer reduces the price to his 
regular customers in order to enable them to 
retain their market, he is tempted to deteriorate 
the article in order to preserve his own profits. 
If the manufacturer cannot or will not reduce 
his price to the dealer, and the regular retailers 
abandon the line, the consumer suffers at least 
the inconvenience of not being able to buy the 
article. 

PRICE MAINTENANCE — NOT PRICE FIXING 

The independent producer of an article 
which bears his name or trade-mark — be he 


256 


BUSINESS — A PROFESSION 


manufacturer or grower — seeks no special 
privilege when he makes contracts to prevent 
retailers from cutting his established selling 
price. The producer says in effect: “ That which 
I create, in which I embody my experience, to 
which I give my reputation, is my property. By 
my own effort I have created a product valuable 
not only to myself, but to the consumer; for I 
have endowed this specific article with qualities 
which the consumer desires, and which the con¬ 
sumer should be able to rely confidently upon 
receiving when he purchases my article in the 
original package. To be able to buy my article 
with the assurance that it possesses the desired 
qualities is quite as much of value to the con¬ 
sumer who purchases it as it is of value to the 
maker who is seeking to find customers for it. 
It is essential that the consumer should have 
confidence, not only in the quality of my prod¬ 
uct, but in the fairness of the price he pays. 
And to accomplish a proper and adequate dis¬ 
tribution of product, guaranteed both as to qual¬ 
ity and price, I must provide by contract against 
the retail price being cut.” 

The position of the independent producer who 
establishes the price at which his own trade- 
marked article shall be sold to the consumer 
must not be confused with that of a combi- 


COMPETITION THAT KILLS 257 

nation or trust which, controlling the market, 
fixes the price of a staple article. The inde¬ 
pendent producer is engaged in a business open 
to competition. He establishes his price at his 
peril — the peril that, if he sets it too high, 
either the consumer will not buy, or, if the arti¬ 
cle is nevertheless popular, the high profits 
will invite even more competition. The con¬ 
sumer who pays the price established by an 
independent producer in a competitive line of 
business does so voluntarily; he pays the price 
asked, because he deems the article worth 
that price as compared with the cost of other 
competing articles. But when a trust fixes, 
through its monopoly power, the price of a 
staple article in common use, the consumer does 
not pay the price voluntarily. He pays under 
compulsion. There being no competitor he 
must pay the price fixed by the trust, or be 
deprived of the use of the article. 

PRICE-CUTTING THE ROAD TO MONOPOLY 

Price-cutting has, naturally, played a promi¬ 
nent part in the history of nearly every Ameri¬ 
can industrial monopoly. 

Commissioner Herbert Knox Smith found, 
after the elaborate investigation undertaken by 
the Federal Bureau of Corporations, that: 


258 


BUSINESS — A PROFESSION. 


“One of the most effective means employed by 
the Standard Oil Company to secure and maintain 
the large degree of monopoly which it possesses, is 
the cut in prices to the particular customers, or in the 
particular markets of its competitors, while main¬ 
taining them at a higher level elsewhere.” 

And Chief Justice White, in delivering the 
opinion of the United States Supreme Court 
in the Tobacco Trust case, said: 

. the intention existed to use the power of 
the combination as a vantage ground to further mo¬ 
nopolize the trade in tobacco by means of trade con¬ 
flicts designed to injure others, either by driving com¬ 
petitors out of the business or compelling them to 
become parties to a combination — a purpose whose 
execution was illustrated by the plug war which, 
ensued and its results, by the snuff war which fol¬ 
lowed and its results, and by the conflict which im¬ 
mediately followed the entry of the combination in 
England and the division of the world’s business by 
the two foreign contracts which ensued.” 

Therefore recent legislative attempts to stay 
monopoly commonly include in some form pro¬ 
hibition against the making of cut-throat prices, 
with a view to suppressing competition. Such 
provisions will be found in the bills proposed by 
Senator La Follette, Congressman Stanley and 
Senator Cummins to supplement the Sherman 


COMPETITION THAT KILLS 259 

Anti-Trust Act; and statutes dealing with the 
subject have been enacted in several States. 

President Wilson urged most wisely that, in¬ 
stead of sanctioning and regulating private 
monopoly, we should regulate competition. 
Undoubtedly statutes must be enacted to secure 
adequate and effective regulation; but shall our 
courts prohibit voluntary regulation of com¬ 
petition by those engaged in business? And is 
not the one-price system for trade-marked 
articles a most desirable form of regulation? 

monopoly’s easiest way 

The competition attained by prohibiting the 
producer of a trade-marked article from main¬ 
taining his established price offers nothing sub¬ 
stantial. Such competition is superficial merely. 
It is sporadic, temporary, delusive. It fails to 
protect the public where protection is needed. 
It is powerless to prevent the trust from 
fixing extortionate prices for its product. The 
great corporation with ample capital, a per¬ 
fected organization and a large volume of busi¬ 
ness can establish its own agencies or sell direct 
to the consumer, and is in no danger of having 
its business destroyed by price-cutting among 
retailers. But the prohibition of price-mainte¬ 
nance imposes upon the small and independent 


260 BUSINESS —A PROFESSION 

producers a serious handicap. Some avenue of 
escape must be sought by them; and it may be 
found in combination. Independent manufac¬ 
turers without the capital or the volume of 
business requisite for engaging alone in the 
retail trade will be apt to combine with exist¬ 
ing chains of stores, or to join with other manu¬ 
facturers similarly situated in establishing new 
chains of retail stores through which to market 
their products direct to the consumer. The 
process of exterminating the small independent 
retailer already hard pressed by capitalistic 
combinations — the mail-order houses, existing 
chains of stores and the large department 
stores — would be greatly accelerated by such 
a movement. Already the displacement of the 
small independent business man by the huge 
corporation with its myriad of employees, its 
absentee ownership and its financier control 
presents a grave danger to our democracy. The 
social loss is great; and there is no economic 
gain. But the process of capitalizing free 
Americans is not an inevitable one. It is not 
even in accord with the natural law of business. 
It is largely the result of unwise, man-made, 
privilege-creating law, which has stimulated 
existing tendencies to inequality instead of dis¬ 
couraging them. Shall we, under the guise of 


COMPETITION THAT KILLS 


261 


protecting competition, further foster monopoly 
by creating immunity for the price-cutters? 

Americans should be under no illusions as to 
the value or effect of price-cutting. It has been 
the most potent weapon of monopoly — a means 
of killing the small rival to which the great 
trusts have resorted most frequently. It is so 
simple, so effective. Far-seeing organized capi¬ 
tal secures by this means the co-operation of 
the short-sighted unorganized consumer to his 
own undoing. Thoughtless or weak, he yields 
to the temptation of trifling immediate gain, 
and, selling his birthright for a mess of pottage, 
becomes himself an instrument of monopoly. 


THE NEW ENGLAND TRANSPORTA¬ 
TION MONOPOLY 

Mr. President and Gentlemen of the New England 
Dry Goods Association: — 1 
The proposed merger presents for the decision 
of the people of Massachusetts the most im¬ 
portant question which has arisen in this Com¬ 
monwealth since the Civil War. I regret 
deeply, therefore, that the eminent counsel of 
the New York, New Haven and Hartford Rail¬ 
road Company should have declined the invi¬ 
tation of your association to present an argu¬ 
ment in favor of the merger. His refusal to 
discuss the question, following many like re¬ 
fusals of invitations extended by other associa¬ 
tions to President Mellen and Vice-President 
Byrnes, is obviously in pursuance of a definite 
policy, and the policy appears to be this: 
Having actually acquired the large block of 
stock in the Boston and Maine Railroad secretly 
and without authority under the laws of Massa¬ 
chusetts — “the less said about it, the better.” 

. \ An address delivered before the New England Dry Goods Asso¬ 
ciation at Boston, February n, 1908. 


TRANSPORTATION MONOPOLY 263 


Against this Standard Oil policy of “ Secrecy and 
Silence,” the opponents of the merger vigorously 
protest. 

Let us define what the merger question really 
is, and recall the circumstances under which it 
has arisen in Massachusetts. 

The merger question is this: Shall the New 
York, New Haven and Hartford Railroad 
Company be permitted to acquire, through 
control of the Boston and Maine, a substan¬ 
tial monopoly of all transportation within New 
England and from New England to the South 
and West — a monopoly including alike steam 
railroads, trolleys and steamboat lines? 

The circumstances under which this question 
arises are as follows: 

For more than a generation the statutes of 
Massachusetts have declared that no railroad 
company shall acquire the stock of any other 
railroad company or of any street railway com¬ 
pany without the express authority of our leg¬ 
islature. This has been the law of Massachusetts 
during all the time that the New York, New 
Haven and Hartford has operated any railroad 
in this Commonwealth. 


264 


BUSINESS— A PROFESSION 


THE NEW HAVEN DEFIANCE OF MASSACHUSETTS 
LAWS 

With this law on the statute books, the New 
Haven Company, without seeking permission 
from our legislature, acquired within three 
years prior to June, 1906, nearly five hundred 
miles of trolleys in central and western Mas¬ 
sachusetts. These trolley purchases threatened 
to extend into the Boston and Maine territory. 
The Boston and Maine had carefully obeyed 
the Massachusetts law which prohibited it 
from making trolley purchases; and it sought 
in 1905 authority from our legislature to do 
with the legislature’s permission what the New 
Haven undertook to do in spite of legislative pro¬ 
hibition. The proposed change in the long- 
established policy of the Commonwealth was 
strenuously opposed. The question was re¬ 
ferred to the Recess Committee of the legis¬ 
lature of 1905; and the question was again 
considered by the legislature of 1906, which 
refused to grant the permission asked. 

Governor Guild then called attention to the 
situation in a memorable special message to the 
legislature (June 23, 1906) in which he said: 

“I congratulate you on the defeat of a measure that 
would have sanctioned the possible consolidation of 


TRANSPORTATION MONOPOLY 265 


all transportation in Massachusetts under the control 
of a single corporation. The present railroad situa¬ 
tion, however, is most unjust and inequitable. Our 
steam railroad system is forbidden to meet the com¬ 
petition of electric street car lines by purchase or 
control of their stock, but another controlled by men 
who are not citizens of Massachusetts is not only 
permitted to exercise that privilege, but is exerting 
it to-day to such an extent that healthy competition 
in western Massachusetts is already throttled. 

“ Slowly, surely, the control of our own railroads, 
the control of the passage to market of every Massa¬ 
chusetts product, the control of the transportation 
to and from his work of every Massachusetts citizen 
is passing from our hands to those of aliens. 

“I therefore urge upon you with all the strength 
that is in me the passage of some legislation giving 
relief from this grave injustice. Let Massachusetts 
announce that transportation within her borders is 
in the future to be controlled by the people of Massa¬ 
chusetts, and not by men beyond the reach of her 
law and the inspiration of her ideals.” 


The message was immediately referred to the 
Joint Committee on Railroads and Street 
Railways. It was then late in June. The ses¬ 
sion had already lasted nearly six months. All 
other legislative business had been disposed of. 
It was urged that consideration of a subject 
so important should not then be entered upon. 
The New Haven Company insisted that it had 


266 BUSINESS —A PROFESSION 

no intention of violating the laws of Massa¬ 
chusetts; that it had been advised that, while 
the Massachusetts statute controlled Mas¬ 
sachusetts corporations, like the Boston and 
Maine, the New Haven Company, having a 
Connecticut charter and operating through a 
subsidiary company, could legally purchase 
railroads and street railways in this State, re¬ 
gardless of the prohibition contained in the 
Massachusetts statute. It invited the Attorney 
General to bring proceedings to test the legal 
validity of its action. The New Haven Com¬ 
pany asserted, furthermore, that it had no 
intent or desire to act contrary to what Massa¬ 
chusetts might declare to be its own policy in 
this respect. 

THE NEW HAVEN BREACH OF FAITH 

It was naturally suggested that this attitude 
on the part of the New Haven was assumed in 
order to delay legislation, so that meanwhile 
it might have the opportunity of continuing 
unhampered its purchases of Massachusetts 
properties. To meet this objection the follow¬ 
ing assurance was given to the legislative com¬ 
mittee by the counsel of the New Haven Com¬ 
pany: 


TRANSPORTATION MONOPOLY 267 


June 27, 1906. 

Representative Joseph Walker, Esq. 

My Dear Mr. Walker: — 

I have communicated with Mr. Mellen by tele¬ 
phone and got from him the following: 

“Mr. Mellen authorizes Mr. Choate to state to 
the Legislature that he will not enter upon further 
acquisitions in Massachusetts other than those al¬ 
ready contracted for, or build any trolley lines except 
such as are now under actual construction, until such 
time as the merger question has been settled. 

“Mr. Mellen is willing, if the Committee desires 
it, to furnish a list of properties already contracted 
for or under construction, to avoid any future mis¬ 
understanding.^ 

Yours truly, 

(Signed) Charles F. Choate, Jr. 

The list of Massachusetts trolley properties in 
which the New Haven was then interested was 
asked for and was furnished by Mr. Mellen. 
After that the legislature refused to pass any 
act dealing with this subject, and adjourned. 
Proceedings were then begun by the Attorney 
General to test the validity of the New Haven’s 
position. While these proceedings were pend¬ 
ing, the New Haven Company, regardless of 
the promise which had been given by Mr. Mel- 
len on its behalf, proceeded with its purchases 
of Massachusetts trolleys. It bought the Mil¬ 
ford, Attleborough, and Woonsocket Street 


268 BUSINESS — A PROFESSION 

Railway Company; it bought the Hartford 
and Worcester, the Uxbridge and Blackstone 
and the Worcester and Holden Street Railway 
Companies. It acquired still other Massa¬ 
chusetts trackage through the Providence Se¬ 
curities Company. 

And it did more. It acquired, without appli¬ 
cation to the legislature, and without notice in 
any way to the public, a large block of stock 
of the Boston and Maine Railroad — 109,948 
shares out of a total of 295,096 outstanding in 
the hands of the public. 

The great merger issue, the most important 
question which has arisen in Massachusetts in 
more than a generation, is thus brought before 
us by conduct on the part of the New Haven, 
which is not only in defiance of the settled policy 
of Massachusetts, as expressed in its statute 
law, but in defiance also of the promise sol¬ 
emnly given to the legislature of the Com¬ 
monwealth and relied upon by it. 

THE PROPOSED TRANSPORTATION MONOPOLY 

Now, let us pass to the question of the merger 
itself and what it involves: 

The possible advantages of a merger have not 
been made clear; but the objections, I submit, 
are clear, and they are insuperable. 


TRANSPORTATION MONOPOLY 269 


First. The merger would result inevitably 
in a complete monopoly of transportation in 
New England. 

It would mean control by the New Haven, not 
only of the Boston and Maine and the Maine 
Central systems, but of all railroads extending 
into New England, except the Grand Trunk and 
the Canadian Pacific. Outside the New Haven, 
the Boston and Maine and the Canadian sys¬ 
tems, there is now no important railroad in 
New England, except the Boston and Albany 
and the Bangor and Aroostook. The Boston 
and Albany is already closely allied with the 
New Haven through a traffic arrangement. 
It will inevitably fall into the New Haven’s 
grasp if the Boston and Maine does. So also 
will the Bangor and Aroostook and the small 
outlying roads. 

But the merger means far more than a mo¬ 
nopoly of the railroads. The New Haven has 
pursued relentlessly in each community to 
which its railroads extend the policy of sup¬ 
pressing all competition whatsoever, existing or 
potential — suppressing, at whatever cost, the 
competition not only of railroads but of steam¬ 
ship lines and of trolley lines as well. What it 
has already done in Connecticut and Rhode 
Island would inevitably be repeated in Massa¬ 
chusetts and in northern New England. 


270 BUSINESS — A PROFESSION, 

See how the New Haven has suppressed all 
competition between Boston and New York: 

The New York and New England Railroad 
was designed to give us an independent all-rail 
line to New York. The New Haven induced 
the Connecticut legislature to refuse authority 
to construct the missing link. The New York 
and New England, however, actually gave us 
an independent rail and water line to New 
York via Norwich and a freight line via the 
Hudson River. The New York and New Eng¬ 
land passed into the hands of receivers and was 
purchased by the New Haven. 

The Central New England Railroad intended 
(in connection with the Boston and Albany) to 
give us an independent line to the Pennsyl¬ 
vania coal fields, and another freight line to 
New York via the Hudson River. It met per¬ 
sistent obstruction in the legislature and in the 
courts of Connecticut. Its securities suffered, 
and it passed into the control of the New Haven. 

A few years ago we had four rail and water 
lines to New York via the Sound — the Fall 
River Line, the Providence Line, the Stoning- 
ton Line and the Norwich Line. All of these 
have passed into the hands of the New Haven; 
and another rail and water line to New York — 
the New Bedford Line — belongs also to the 


TRANSPORTATION MONOPOLY 271 

New Haven. Later a new competitor — the 
Joy Line — arose; but soon it also passed into 
New Haven control. 

Finally the Enterprise Transportation Com¬ 
pany was started, with boats running from 
New York to Fall River and to Providence, and 
with good promise of success. The New Haven, 
under secret cover of the Neptune Line and of 
the Joy Line, entered into fierce competition 
with the Enterprise Transportation Company. 
Last October the Enterprise Transportation 
Company succumbed. It passed into the hands 
of a receiver, and shortly after the New Haven 
purchased the Kennebec , one of its best boats. 

Not a single independent line of steamboats 
exists between Massachusetts and New York 
except the Metropolitan Line; and now that, 
like other competitors of the New Haven, has 
passed into receivers’ hands. May we not 
expect to see, as the next step, its fine steam¬ 
ships, the Harvard and the Yale , flying the 
New Haven flag, and the last vestige of 
steamship competition disappear? 

A few years ago we heard promises of inde¬ 
pendent trolley lines from Boston to New York. 
The key to such a line was a franchise east 
from New York City. Two franchises were 
given — the New York, Westchester, and Bos- 


<m BUSINESS — A PROFESSION 

ton Railway Company and the New York and 
Port Chester Railroad Company — both given 
with the understanding that they should pro¬ 
vide competition with the New Haven. The 
New Haven, at huge expense, acquired both 
franchises, and suppressed the nascent com¬ 
petition. 

The policy of suppressing competition at any 
cost, pursued with respect to through lines 
between Boston and New York, has been fol¬ 
lowed by the New Haven throughout its terri¬ 
tory. Under that policy the New Haven has 
acquired in all about fifteen hundred miles of 
trolley tracks — substantially all the trolleys in 
Connecticut and in Rhode Island, and nearly 
six hundred miles of line in central and western 
Massachusetts. It has even extended its lines 
into Vermont and northern New York. 

No competitor was too large to be overcome, 
and none so insignificant as to be tolerated. 
Thus the New Haven acquired the lesser steam¬ 
boat lines from New York to Connecticut and 
to Rhode Island ports — the Bridgeport Line, 
the New Haven Line, the Hartford Line and the 
Block Island Line. And with this nearer field 
covered, it undertook to extend its acquisitions 
to more distant ports, far beyond the present 
territory of its rail lines. It purchased, at large 


TRANSPORTATION MONOPOLY 273 


cost, a line from New York to Portland, Maine. 
It purchased a line from Boston to Philadelphia; 
and then, in connection with that purchase, it 
acquired a substantially controlling interest in 
the Merchants & Miners Transportation Com¬ 
pany, with lines from Boston to Philadelphia, 
to Baltimore and to Norfolk. 

If the New Haven secures the Boston and 
Maine system, it appears inevitable that the 
control which the New Haven has already 
acquired over the Boston and Albany through a 
traffic agreement will become practically abso¬ 
lute, that the New Haven’s policy of acquiring 
trolleys will be further extended, and that 
soon all means of transportation by steam, by 
trolleys or by established steamship lines within 
New England, or from New England south and 
west, will be absolutely under New Haven 
control. The only other outlet for the people 
and products of Massachusetts will be across 
the Atlantic or to Canada. 

AN ALIEN MONOPOLY 

Second. This monopoly by the New Haven in 
transportation within New England and from 
New England south and west would be con¬ 
trolled by persons alien to Massachusetts, not 
only in their financial interests, but in their 


274 


BUSINESS —A PROFESSION 


traditions and aspirations. How little the voice 
of Massachusetts would be heeded in the man¬ 
agement may be inferred from the present 
conditions. 

Although more than one-half of the stock¬ 
holders of the New Haven are residents of Mas¬ 
sachusetts, and although they owned, June 30, 
1907, $35,000,000 out of $97,000,000 of New 
Haven stock outstanding in the hands of the 
public, as well as a larger part of its outstanding 
bonds and notes, Massachusetts has to-day 
upon the board of directors of the New Haven 
only two members out of twenty-three. It had 
one other member, making up the full board of 
twenty-four, but Mr. Charles F. Choate, long a 
member of the New Haven board, resigned 
recently. 

Apparently the influence of the Massachu¬ 
setts members in the board has been propor¬ 
tionate to their number. 

ALIEN INTERESTS 

Third. This monopoly in transportation would 
not only be controlled by non-residents of Mas¬ 
sachusetts, but, as the New Haven’s transpor¬ 
tation lines would extend into at least six other 
States, the management, though intending to 
act with entire fairness to Massachusetts, 


TRANSPORTATION MONOPOLY 275 


might deem it proper to postpone the interests 
of Massachusetts to those of some other State 
or States. It might seem best to the manage¬ 
ment of this transportation monopoly to favor 
New York, or New London, or Providence, or 
Portland, as against Boston, not from any 
malevolent motive, but solely in the supposed 
interests of the company. 

Yet we of Massachusetts have the solemn ob¬ 
ligation of protecting and advancing our own 
welfare. We must not intrust the determina¬ 
tion as to what our welfare demands to the de¬ 
cision of persons who may be influenced by 
considerations other than the interests of 
Massachusetts. 

COMBINATION INEFFICIENT 

Fourth. The very size of the proposed con¬ 
solidated system and the diversity of its in¬ 
terests would be such as to impair its efficiency. 
The company would not be merely a large rail¬ 
road company, but an aggregation of trolley 
companies, of steamship companies, of gas com¬ 
panies and power companies, an electric light 
company and a water-supply company. For 
thus comprehensive are the varying activities 
of the New Haven. 

For every business concern there must be a 


276 


BUSINESS —A PROFESSION 


limit of greatest efficiency. What that limit is 
differs under varying conditions; but it is clear 
that an organization may be too large for ef¬ 
ficient and economical management, as well as 
too small. The disadvantages attendant upon 
size may outweigh the advantages. Man’s 
works have outgrown the capacity of the in¬ 
dividual man. No matter what the organization, 
the capacity of the individual man must deter¬ 
mine the success of a particular enterprise, not 
only financially to the owners, but in service 
to the community. Organization can do much 
to make possible larger efficient concerns; but 
organization can never be a substitute for 
initiative and for judgment. These must be 
supplied by the chief executive officers, and 
nature sets a limit to their possible accomplish¬ 
ment. Any transportation system which is 
called upon not merely to operate, but to 
develop its facilities, makes heavy demands 
upon its executive officers for initiative and for 
the exercise of sound judgment. And New 
England needs most emphatically development 
of its transportation facilities. To aid in this 
development we need more minds, not less. 

Massachusetts has had and is having a les¬ 
son on the evils of too large units which should 
not readily be overlooked, namely the wretched 


TRANSPORTATION MONOPOLY 277 

service of the Boston and Albany Railroad. 
Even in mere operation that railroad has failed 
egregiously as compared with its condition prior 
to its lease to the New York Central. And what 
is the cause of this failure? Not, I submit, in¬ 
tentional neglect, on the part of the officials of 
the New York Central, of the interest of Massa¬ 
chusetts or the comfort of its patrons; not any 
purpose on the part of the management to 
prefer other communities to our own. The 
wretched service is due, in the main at least, 
to the fact that the New York Central System 
is greater than the administrative capacity of 
its executive officers. From that overgrowth 
its finances, its service and its patrons have 
alike suffered. And we may be sure that if we 
spread the ability of the New Haven manage¬ 
ment over a larger field we shall get, not better, 
but worse, service throughout the whole ter¬ 
ritory. 

POLITICAL DANGERS 

Fifth . The political dangers surrounding a 
monster corporation controlling all transpor¬ 
tation facilities of New England are too ob¬ 
vious to require comment, particularly in the 
case of a corporation having the political tra¬ 
ditions which surround the New Haven. 


278 


BUSINESS —A PROFESSION 


IMPOSSIBLE TO “ SAFEGUARD ” MONOPOLY 

Sixth . It has been suggested that we accept 
the proposed monopoly in transportation, but 
provide safeguards. 

This would be like surrendering liberty and 
substituting despotism with safeguards. There 
is no way in which to safeguard people from 
despotism except to prevent despotism. There 
is no way to safeguard the people from the evils 
of a private transportation monopoly except to 
prevent the monopoly. The objections to des¬ 
potism and to monopoly are fundamental in 
human nature. They rest upon the innate and 
ineradicable selfishness of man. They rest 
upon the fact that absolute power inevitably 
leads to abuse. They rest upon the fact that 
progress flows only from struggle. 

Furthermore, the most carefully devised 
safeguards are in many respects futile. The 
legislation authorizing the Boston and Albany 
lease was surrounded by all safeguards which 
an able governor, the legislature and our busi¬ 
ness organizations could devise. Have these 
safeguarding provisions reduced or made more 
tolerable the wretched service which we have 
received? 


TRANSPORTATION MONOPOLY 279 


FALSE ANALOGY OF SOME LOCAL MONOPOLIES 

Seventh. The analogy sometimes urged in 
favor of existing well-operated local monopolies 
in lighting, or gas, or street railways is delu¬ 
sive. In the first place a local gas company 
may have a monopoly of gas, but it has not a 
monopoly of lighting. It has the competition 
of electric light and the competition of oil. 

But there is furthermore this marked differ¬ 
ence : A local monopoly, like a gas company, or 
an electric light company or a street railway com¬ 
pany, is but a creature, a servant of the State, 
wholly subject to the control of the State within 
which it is situated, wholly dependent for its 
prosperity upon the particular community which 
it serves; and in Massachusetts subject at all 
times to being terminated by the authority 
which created it. 

The street railways of Massachusetts and the 
gas and electric light companies of Massachu¬ 
setts, so far as they are monopolies, are per¬ 
forming practically, as agents of the State, pub¬ 
lic functions during good behavior. If they do 
not properly serve the community, the com¬ 
munity may at any time terminate their fran¬ 
chises without even paying compensation. The 
right to run street railways in our public streets, 


280 BUSINESS —A PROFESSION 

the right to lay gas pipes or electric light wires, 
is a license merely, and is subject at all times 
to termination by the State and the municipal 
authorities. There is no resemblance between 
such a monopoly of service covering a specific 
agency and the proposed New Haven monopoly 
of all transportation, a monopoly which claims 
rights under the laws of other States, and has 
asserted, though operating also in Massa¬ 
chusetts, that it is free from the restrictions im¬ 
posed by the Massachusetts law. And yet even 
in respect to these local service monopolies, 
Massachusetts recognized as early as 1894 that 
legislation was necessary to protect our people 
from the abuses incident to their being con¬ 
trolled by foreign corporations. 

THE DANGERS OF A HOLDING COMPANY 

Eighth. Furthermore, it must be remem¬ 
bered that the New Haven Company is not a 
transportation company merely. It is a huge 
holding company. Its freedom in the issue of 
its own securities and its broad charter powers 
to hold securities of other companies expose us 
to the same conditions which have made Harri- 
man a menace to America. The primal cause 
of Harriman’s power has been his ability to use 
the treasury and credit of the Union Pacific 


TRANSPORTATION MONOPOLY 281 


for practically any purpose. The Union Pacific 
was once a corporation with power to construct 
and operate a railroad within given limits. It 
has become a corporation with almost universal 
powers. And these large powers have been 
exercised practically by one individual, instead 
of being subject to the action of the stockholders. 

Precisely similar operations may be pursued 
by the New Haven management, particularly 
since it secured its new Connecticut charter. 
Indeed its act in taking over this large interest 
in the Boston and Maine stock without action 
on the part of its own stockholders shows the 
extraordinary power heretofore exercised by 
the New Haven management. And the position 
for the future is even more dangerous than it 
has been in the past. 

THE NEW HAVEN’S FINANCIAL CONDITION 

Ninth. The above objections to the merger 
would exist even if the New Haven were to-day 
the financially strong and conservatively man¬ 
aged railroad which it was for many years 
prior to the advent of Mr. Mellen. But its 
financial condition is vastly changed. Once 
financially the strongest railroad company in 
America, it has by excessive expansion become 
perilously weak. The burdens which it has 


282 


BUSINESS —A PROFESSION 


assumed must for many years greatly hamper 
its ability to serve the Commonwealth. Its 
impaired credit will prevent it from making fur¬ 
ther large improvements. The excessive prices 
paid to suppress trolley and steamboat competi¬ 
tion create a permanent heavy charge upon all 
future traffic. How it will be able to bear the 
burdens thus created will, for some time, remain 
a question. But it is clear that the burdens al¬ 
ready assumed have taxed to the uttermost, not 
only the ability of the managers, but the finan¬ 
cial resources of the company itself. There is 
no surplus of ability or of credit which is avail¬ 
able for extending its operations to another 
great system with a railroad mileage larger than 
its own . 1 

THE BOSTON AND MAINE 

Tenth. And the Boston and Maine system is 
a great system. Its physical condition ought un¬ 
doubtedly to be much improved. Additional 
facilities should be added and developed. But 
it possesses a solid foundation upon which to 
rest such development. The Boston and Maine 
is one of America’s leading railroad systems. 
Including leased lines and railroads controlled 

1 This subject was discussed elaborately by Mr. Brandeis in a 
pamphlet entitled: “ Financial Condition of the New York, New 
Haven & Hartford Railroad Company and of the Boston and Maine 
Railroad,” published in December, 1907. 


TRANSPORTATION MONOPOLY 283 

but operated separately, it has 3,559.52 miles 
of line, and a total trackage of 5,817.71 miles. 
For the year ending June 30, 1907, the gross 
earnings of the system from operation were 
$50,986,553.60. Of the 852 operating com¬ 
panies in the United States, with an aggregate 
mileage of 220,028 miles, reporting to the 
Interstate Commerce Commission for the year 
ending June 30, 1906, only thirteen had gross 
earnings as large as that. 

The miles of line owned or leased by the 
Boston and Maine Railroad are 2,232.25 as 
compared with 2,006.23 owned and leased by 
the New Haven. The freight tonnage carried 
one mile on these lines by the Boston and Maine 
Railroad in the year ending June 30, 1907, was 
2,296,970,964 as compared with 1,927,686,950 
tons carried by the New Haven. 

In the six years ending June 30, 1907, it in¬ 
creased its gross earnings 34.41 per cent, while 
the increase of its capitalization was only 21.4 
per cent, and the fixed charges increased only 
2.72 per cent. 

It is for Massachusetts to build up this dis¬ 
tinctly Massachusetts railroad so that it shall 
be worthy of Massachusetts; and the capital 
required for making it meet all the demands of 
Massachusetts for proper transportation facili- 


284 BUSINESS — A PROFESSION. 

ties can be and should be had. Massachusetts 
now recognizes the serious error which it com¬ 
mitted in leasing the Boston and Albany to the 
New York Central. It should not commit the 
infinitely greater mistake of surrendering the 
Boston and Maine and its own prosperity to 
the New Haven Company. 

IMMEDIATE LEGISLATION NECESSARY 

Eleventh. The public did not discover until 
May, 1907, that the New Haven Company had 
secretly acquired this large block of stock in 
the Boston and Maine Railroad. It was then 
too late in the legislative session adequately and 
definitely to consider the subject. The legisla¬ 
ture, with a view to providing for such consid¬ 
eration, passed a temporary restraining act by 
which the New Haven was prohibited until 
July 1, 1908, from attempting to vote on stock 
already acquired, or otherwise exercising con¬ 
trol over the Boston and Maine Railroad, and 
from acquiring any additional stock in that 
company. 

As this act expires July 1, 1908, and the New 
Haven Company, through the possession of 
nearly forty per cent of the Boston and Maine 
stock, has an interest so large that it may easily 
be converted into a working majority, the 


TRANSPORTATION MONOPOLY 285 


merger of the two systems will be practically 
complete on July i, 1908, unless at the present 
session further legislation is enacted which shall 
not only compel the New Haven Company to 
dispose of the stock already acquired by it with¬ 
out authority under the laws of Massachusetts, 
but shall also prohibit it from in any way 
undertaking to exercise control over the Boston 
and Maine Railroad. 

The control by the New Haven of the Boston 
and Maine through stock ownership would be 
the most dangerous form of merger — a merger 
with full power and with no responsibility. 

Governor Guild wisely said: 

“I therefore urge upon you with all the strength 
that is in me the passage of some legislation giving 
relief from this grave injustice. Let Massachusetts 
announce that transportation within her borders is 
in the future to be controlled by the people of Massa¬ 
chusetts, and not by men beyond the reach of her 
law and the inspiration of her ideals.” 


THE NEW HAVEN—AN UNREGULATED 
MONOPOLY 1 


The breakdown of transportation in New 
England under the New Haven monopoly has 
become obvious. Demoralized and curtailed 
freight service, antiquated equipment, frequent 
wrecks, discontented employees, heavy depre¬ 
ciation in the market value of securities, and 
huge borrowing on short-time notes at high 
interest are the accumulated evidences of 
that deterioration in our transportation system 
which has been in process during the past eight 
years of aggressive monopolization. 

The demand for a remedy is loud and urgent. 
What remedy shall we apply? Shall the mo¬ 
nopoly now breaking down be broken up, or 
shall we attempt to patch it up by regulation? 

Let us consider first the causes of our present 
ills. 

These ills result from monopoly. But, while 
the policy of monopoly is the fundamental cause 

1 Published in the “ Boston Journal,” December 13, 1912. 


UNREGULATED MONOPOLY 


287 


of the deterioration of our transportation system, 
it has itself bred subsidiary causes; and of these 
subsidiary causes excessive bigness is probably 
the most potent. 

Excessive bigness often attends monopoly; 
but the evils of excessive bigness are something 
distinct from and additional to the evils of 
monopoly. A business may be too big to be 
efficient without being a monopoly; and it may 
be a monopoly and yet (so far as concerns size) 
may be well within the limits of efficiency. 
Unfortunately, the so-called New Haven system 
suffers from both excessive bigness and from 
monopoly. 


THE MONOPOLY 

The New Haven monopoly of transportation 
in New England, now substantially complete, 
rests upon ownership or legal control of an effect¬ 
ive interest in: 

First. Substantially all the railroads in Maine, 
New Hampshire, Massachusetts, Rhode Island 
and Connecticut, except the Grand Trunk’s 
line from Canada to New London and to Port¬ 
land, the Canadian Pacific Line through north¬ 
ern Maine, and the Bangor and Aroostook. 

Second. Substantially all the trolley lines 
in Rhode Island and Connecticut, the most 


288 BUSINESS — A PROFESSION 

important in western and central Massachu¬ 
setts, and some in Maine, New Hampshire, 
Vermont and New York. 

Third. Substantially all the steamship lines 
from any of the New England States to New 
York or Philadelphia or Baltimore. 

The control which the New Haven, a pri¬ 
vately owned corporation, holds over Boston is 
without parallel in the whole world. All rail¬ 
roads entering Boston (unless the Boston, 
Revere Beach and Lynn be called a railroad and 
is independent) are either owned by the New 
Haven, or controlled legally or through an 
effective interest; for it has such a partnership 
interest also in the Boston and Albany. All 
the coastwise steamship lines sailing from Bos¬ 
ton for New York, Philadelphia or Baltimore 
are owned or controlled legally or, influenced 
through an effective interest. 

Among the American cities Boston ranks 
second in assessed wealth. Among the American 
seaports Boston ranks second in foreign com¬ 
merce. Among the American centers of popu¬ 
lation Boston (including suburbs) ranks fourth. 
But Boston, alone of all the large cities of the 
United States, is in the grip of a railroad mo¬ 
nopoly. The following is the position of the 
other large cities: 


UNREGULATED MONOPOLY 289 
Railroad Systems 

New York has.8 Milwaukee has.5 

Chicago has .19 Cincinnati has.6 

Philadelphia has.3 Newark has.5 

St. Louis has.17 New Orleans has .... 5 

Cleveland has.5 Minneapolis has ... . 8 

Baltimore has.3 Kansas City has .... 10 

Pittsburg has.5 Louisville has.7 

Detroit has.7 Denver has.6 

Buffalo has.9 Seattle has .5 

San Francisco has .... 4 

One railroad system has Boston 


A DELUSIVE COMPARISON 

Advocates of monopoly urge that the days of 
competition are passed; that to insist upon 
competition is to go backward, not forward; 
that (at least as to railroads and our public- 
service corporations) the path of progress lies 
in regulation, and that this remedy should be 
relied upon with respect to the New Haven. 

The contention rests upon a half-truth and a 
misconception. Undoubtedly we need effective 
regulation of railroads as well as of other public- 
service corporations, whether they be monopo¬ 
lies or competitive concerns. 

Undoubtedly, also, certain public services, 
local in character, like those supplying gas or 
water, will, on the whole, be best performed by 
monopolies, if effectively regulated; or, as in 
the case of the telephone, may as monopolies 












290 


BUSINESS — A PROFESSION 


best serve the public convenience. But the 
instances of desirable private monopolies are 
exceptional; and the transportation service 
(other than local) is not within the exception. 
The difference is clearer. 

1. When a local gas company (as in Bos¬ 
ton) is given a monopoly, it is a monopoly only 
in gas, and not a monopoly in all lighting. The 
gas company is subjected to the competition 
of electric light and to the competition of oil. 

Indeed, where a monopoly in gas and electric 
lighting is combined in the same company, the 
results are clearly less satisfactory than they are 
where the gas company and the electric light 
company compete vigorously (as in Boston) with 
one another. 

2. There is also this marked difference be¬ 
tween such a local monopoly, even if complete, 
and a monopoly like the New Haven: 

A local monopoly, like a gas company or 
electric light company or a street railway com¬ 
pany, is but a creature, a servant of the State, 
and as such wholly subject to the control of 
the State within which it is situated. 

In Massachusetts, where such local monopo¬ 
lies have been satisfactorily conducted, the 
company has at all times been absolutely sub¬ 
ject to the will, not only of the State, but even 


UNREGULATED MONOPOLY 


291 


largely to the will of the particular community 
which it serves. 

Its whole business is dependent upon the 
license to use the streets; and this license is 
terminable at the will of the people. In other 
words, the street railways of Massachusetts and 
the gas and electric light companies of Massa¬ 
chusetts are practically permitted to perform 
as agents of the State public functions during 
good behavior. 

If they do not properly serve the community, 
the community may at any time terminate 
their franchises or license without even paying 
compensation. 

Furthermore, these Massachusetts public- 
service corporations cannot issue any securities 
without the consent of the Commonwealth. They 
cannot pass under the control of a foreign cor¬ 
poration without their charter becoming liable to 
forfeiture. The control of the State is absolute. 

This reserved power in the community is an 
effective weapon by which the community may 
compel the corporation to supply the service it 
needs. Thus it compelled the West End Street 
Railway to lease the Tremont Street subway and 
to remove the surface tracks from Tremont 
Street. It compelled the Boston Elevated to lease 
the line beyond Forest Hills and give five-cent 


292 


BUSINESS — A PROFESSION 


fare to Boston. It compelled recently the con¬ 
solidation of the West End and Elevated and 
the leasing of the Boylston Street and Dorches¬ 
ter subways. Eighty-cent gas and the recent 
satisfactory gas service were obtained by a like 
struggle and the threat of municipal gas as an 
alternative. 

THE NEW HAVEN SUPERIOR TO OUR LAW 

Between a street railway, gas or electric light 
monopoly, existing under such conditions, and 
the New Haven monopoly in transportation 
there is no real resemblance. The New Haven 
claims rights under the laws of seven States and, 
in addition, under acts of Congress. Massa¬ 
chusetts has, except in strictly local matters, 
no effective legal control over the company. 
Neither the Massachusetts legislature, nor any 
commission it may create, can regulate the 
New Haven in any of its important functions. 
Any statute attempting to do so would be void 
as interfering with interstate commerce. 

And Massachusetts cannot enforce her will 
even as to intrastate matters, as it does in the 
case of street railways, gas and other street-using 
corporations; because the railroad franchises 
cannot be taken without paying compensation. 
Massachusetts prohibited the New Haven from 


UNREGULATED MONOPOLY 293 

issuing stock without the consent of the rail¬ 
road commissioners. The New Haven disobeyed 
the laws with impunity. Massachusetts laws 
prohibited the New Haven from issuing more 
bonds than stock. The New Haven disobeyed 
the laws with impunity. Massachusetts laws 
prohibited the New Haven from acquiring 
steamship lines. The New Haven disobeyed 
the laws with impunity. Massachusetts laws 
prohibited the New Haven from consolidating 
with other companies. The New Haven dis¬ 
obeyed the laws with impunity. In each 
instance these prohibitions were a part of Mas¬ 
sachusetts’ plan for regulating railroad com¬ 
panies; but the New Haven claimed the right 
to act under the laws of another State, and 
successfully defied Massachusetts. 

And the recent Grand Trunk incident fur¬ 
nished another and a striking instance of our 
inability to regulate this monopoly. The New 
Haven, having been unable to prevent the 
passing of the enabling act providing for this 
competition, nullified the law by an arrange¬ 
ment with the Grand Trunk. 

A DIVIDED LOYALTY 

There is, however, another and very im¬ 
portant respect in which local monopolies, like 


294 BUSINESS— A PROFESSION 

gas and electric light and street railways, differ 
from the interstate monopolies. The prosperity 
of the local monopoly is absolutely dependent 
upon the prosperity of the community in which 
it is situated. Self-interest demands that the 
company owning the local monopoly should 
endeavor to advance the prosperity of the 
community which it serves. But in the case of 
the New Haven monopoly there are several 
communities served and there is a distinct di¬ 
versity of interest between those communities. 
The interests of Boston and northern New 
England are in many respects directly opposed 
to the interests of New York City. The in¬ 
terests of our merchants and manufacturers 
are in many respects directly opposed to the 
interests of the Wall Street financiers, who 
control the destinies of the New Haven. 
Northern New England might suffer by the 
New Haven serving New York, Connecticut 
and Rhode Island in preference to this Com¬ 
monwealth. The prosperity of Massachusetts 
and northern New England is at present abso¬ 
lutely dependent on the New Haven; but the 
New Haven's prosperity is not absolutely de¬ 
pendent upon Massachusetts and northern New 
England; 


UNREGULATED MONOPOLY 


295 


THE LIMITS OF REGULATION 

The policy of regulating public-service com¬ 
panies is sound; but it must not be over¬ 
worked. The scope of any possible effective 
regulation of an interstate railroad, either by 
the federal or by State commissions, is limited 
to a relatively narrow sphere. Regulation may 
prevent positive abuses, like discriminations, 
or rebating, or excessive rates. Regulation may 
prevent persistent disregard of definite public 
demands, like that for specific trains or for 
stops at certain stations. Regulation may 
compel the correction of definite evils, like the 
use of unsanitary cars. But regulation cannot 
make an inefficient business efficient. Regula¬ 
tion cannot convert a poorly managed railroad 
into a well-managed railroad. Regulation can¬ 
not supply initiative or energy. Regulation 
cannot infuse into railroad executives the will 
to please the people. Regulation cannot over¬ 
come the anaemia or wasting-sickness which 
attends monopoly. Regulation may curb, but 
it cannot develop the action of railroad officials. 

For no commission, however broad its powers, 
however able, fearless and diligent its members, 
can perform the functions of general man¬ 
ager and the board of directors of a railroad sys- 


296 


BUSINESS —A PROFESSION 


tem; or supply the incentive and the eagerness 
to please the public and that development which 
results from the necessities of competition. 
It is to lack of efficiency, to the lack of ap¬ 
preciation of the community’s needs, and to the 
lack of this eagerness to please its customers 
that our demoralized transportation service is 
in large measure due. 

For instance, bad freight service has seriously 
impaired the prosperity of New England. De¬ 
liveries of freight have been almost incredibly 
slow and unreliable. The effect upon the busi¬ 
ness concerns has been very serious. Success of 
individual businesses has been imperilled. Pros¬ 
perity of all New England has been retarded. 
All this has happened in a period in which the 
country has been blessed with an able, fear¬ 
less and upright Interstate Commerce Commis¬ 
sion, possessing broad legal powers. The recent 
hearings before that commission have disclosed 
the evils from which the community suffers. 
The recent public disclosures will undoubt¬ 
edly result in correcting some specific evils 
which have been pointed out; but the com¬ 
mission cannot by any order make the railroads 
give the shippers good service. Regulation 
cannot produce efficient and enlightened rail¬ 
road operation in the interests of the public; 


UNREGULATED MONOPOLY 


297 


and without that the community cannot get 
satisfactory service. 

The efficiency of regulation, even within its 
acknowledged sphere, is quite limited. The 
Bridgeport wreck of 19n was caused, as the 
Interstate Commerce Commission found, by the 
maintenance of a short crossover. It was un¬ 
doubtedly lack of judgment in the railroad 
originally to establish such a short crossover. 
When the short crossover was found to be the 
cause of the accident, the commission recom¬ 
mended its abolition. The recommendation 
was ignored by the railroad; the change was not 
made. And the terrible Westport accident of 
1912 was the result of ignoring the recommenda¬ 
tion. The Interstate Commerce Commission 
surely performed its full duty of regulation in 
this connection; and yet the community was 
subjected to this serious result of inefficiency 
in railroading. 

THE NEED OF COMPETITION 

No one has recognized more fully than mem¬ 
bers of the Interstate Commerce Commission 
the limitation of accomplishment through rail¬ 
road regulation. No one recognizes better than 
they the continuing need of competition to 
secure satisfactory service. 


298 BUSINESS — A PROFESSION 

This appears very clearly from Chairman 
Prouty’s letter to the President, written March 
12, 1912, referring to the proposal to permit 
railroad-owned ships to use the Panama Canal, 
but referring generally to all water trans¬ 
portation, in which he says: 

“The commission, after consideration, is unani¬ 
mously of the opinion that if the waterways of this 
country are to be of any substantial benefit in the 
way of reducing the rates of transportation, it is ab¬ 
solutely essential that rail carriers be prohibited from 
owning or controlling, directly or indirectly, com¬ 
peting water carriers.” 

Congress, also, by an overwhelming ma¬ 
jority, testified to its conviction that the Inter¬ 
state Commerce Commission was right in de¬ 
claring such competition in transportation to be 
essential to our prosperity; for it not only pro¬ 
hibited railroad-owned steamships from using 
the Panama Canal, but insisted upon insert¬ 
ing in the Canal Act a general provision by which 
all railroads engaged in interstate commerce are 
prohibited from owning or operating any com¬ 
peting water lines on any routes after July 1, 
1914, unless the commission should, upon inves¬ 
tigation of the particular line, find that its opera¬ 
tion is of advantage to the convenience and 
commerce of the people; or that such service 


UNREGULATED MONOPOLY j 299 

would not retard competition by other vessels 
on the water route under consideration. 

Of course, competition between carriers is 
not synonymous with rate-cutting. New Eng¬ 
land longs for good service even more than for 
lower rates. The Interstate Commerce Com¬ 
mission may effectively prevent increases in 
rates; and may protect the community by en¬ 
forcing reductions. 

But even in its admitted field care must 
always be taken not to overwork the Inter¬ 
state Commerce Commission by creating 
conditions of monopoly under which burdens 
would develop greater than it could probably 
bear. The excellent work which the Commis¬ 
sion has so far done has been possible only 
because existing competition between rail¬ 
roads has to a large extent produced develop¬ 
ment and supply of reasonable facilities, and, 
in the main, reasonable rates; each railroad 
acting, to a certain extent, as a check upon 
the other. Such is the condition in Wisconsin, 
where the best success in regulation of railroads 
has been attained. To abandon competition in 
transportation and rely upon regulation as a 
safeguard against the evils of monopoly would 
be like surrendering liberty and regulating 
despotism. 


300 


BUSINESS — A PROFESSION 


THE MONOPOLY UNCONTROLLABLE 

The Grand Trunk incident shows clearly that 
a powerful interstate monopoly like the New 
Haven with its banking affiliations is uncon¬ 
trollable, so long as the monopoly is allowed to 
continue. The people of Massachusetts and 
of Rhode Island, after some unsatisfactory ex¬ 
perience with the New Haven’s monopoly of 
transportation, determined to secure competi¬ 
tion. The Boston Chamber of Commerce and 
other trade organizations of these States insisted 
that the Grand Trunk should be permitted to 
secure an independent entrance into Boston and 
into Providence. The governors of these sover¬ 
eign States, the mayors of their chief cities, 
recommended the necessary legislation. The 
legislatures, after long deliberation, passed the 
required acts in spite of all the opposition 
which the New Haven could interpose. Con¬ 
struction of the line through Massachusetts to 
Providence was commenced, and, despite the 
obstacles presented by the New Haven, was 
nearing completion. Contracts were let for 
the new line of Grand Trunk boats from 
Providence to New York. Surveys for the 
Grand Trunk railroad into Boston were being 
made. 


UNREGULATED MONOPOLY 301 

Then the powerful New Haven monopoly, 
by threat, bribe or other influence, stopped 
construction and secured the abandonment of 
the competitive project. The laws of Massa¬ 
chusetts and of Rhode Island were nullified; 
the will of the people of two supposedly sover¬ 
eign States was defied; and there is no power 
of regulation now possessed by, or which can 
be conferred upon, any State railroad commis¬ 
sion or the Interstate Commerce Commission 
which could prevent or redress such a wrong 
to the people. 

THE CURSE OF BIGNESS 

But even if it were possible to really regu¬ 
late the New Haven monopoly, efficient and 
satisfactory transportation would be unat¬ 
tainable because the New Haven suffers not 
only from monopoly, but also from excessive 
bigness. 

The New Haven is not strictly a system; it 
is an agglomeration of properties. Its huge 
bulk was attained, not by normal growth, but by 
acquisition. It represents not so much a devel¬ 
opment as a putting together. Furthermore, 
it is an agglomeration, not of railroads merely, 
but of railroads, steamships, trolleys and other 
properties. 


302 


BUSINESS — A PROFESSION 


Here are some of the properties which the 
New Haven railroad, with 2,006 miles of line, 
has purchased or acquired control of, or an 
effective interest in, during the last eight years 
of aggressive monopolization: 


(1) Railroads line 

Boston and Maine system. ; .2,449 

Montpelier and Wells River and the Barre railroads . . 66 

Maine Central system.1,410 

Sandy River and Rangeley Lakes. 102 

Bridgeton and Saco. 21 

Sebasticook and Moosehead. 16 

Rangeley Lakes and Megantic. 11 

New York, Ontario and Western. 513 

Central New England. 272 

New York, Westchester and Boston. 274 


4,934 

These railroads have a total of 7,245 miles of track. 

The New Haven acquired also: 

1. One-half the New York Central holdings of preferred 
stock (and would have acquired all but for adverse legal pro¬ 
ceedings) in the Rutland Railroad, with 415 miles of line. 

2. One-half interest in the results of operating the Boston 
and Albany, with 392 miles of line. 


(2) Trolleys 


Miles op 
Line 


In Connecticut, 37 trolley lines. 773 

In Rhode Island, 12 trolleys. 347 

In Massachusetts, 19 trolley lines. 481 

(The New Haven claims to have divested itself of 
control of a large part of these.) 

In New York, 3 trolley lines. 58 

In New Hampshire, 2 trolley lines. 47 

In Vermont, 1 trolley line.. 21 


1,727 

















UNREGULATED MONOPOLY 


303 


(3) Steamship Lines 

Joy Line. 

Hartford and New York Transportation Company. 

Maine Steamship Line (now merged in Eastern Steamship 
Company). 

Metropolitan Steamship Company (now merged in Eastern 
Steamship Company). 

Boston and Philadelphia (now merged in Merchants’ and 
Miners’). 

To acquire the mere control or interest in new 
properties, the New Haven invested, during 
the last ten years of aggressive monopolization, 
about $250,000,000. In that period the New 
Haven increased its own capitalization and 
other direct and contingent liabilities nearly 
sixfold, or from $87,000,000 to $530,000,000. 

Before the New Haven acquired control of 
these properties they were in large part oper¬ 
ated independently and by different groups of 
executive officers. Since the acquisition, and 
as a necessary incident of incorporating them 
into the so-called system, a few New Haven 
officials have, in effect, been charged with the 
management of them all. For a few men to 
manage all these properties well surpasses 
human capacity. 

INTENSIVE RAILROADING 

The bulk of the New Haven properties is 
huge; but it is not the huge bulk alone which 


304 


BUSINESS —A PROFESSION 


renders impossible the task of efficient man¬ 
agement. The New Haven properties are 
diverse in character and widely scattered; but 
it is not these facts which present the most 
serious difficulty in their operation. The in¬ 
superable obstacle to efficient management of 
the New Haven properties, in addition to the 
status of monopoly, lies in the fact that almost 
each one of these many diverse properties, 
agglomerated into a so-called system, presents 
many problems which are not only important, 
but are individual to the particular property 
and to the particular community served by 
it. That results necessarily from the con¬ 
ditions surrounding transportation in New 
England. 

For the solution of each of these problems 
there is required, not only separate investi¬ 
gation, but careful weighing of relevant facts. 
In order to secure unity of purpose and action, 
all these problems must be passed upon ulti¬ 
mately by the same chief executives. Now, 
the number of such decisions which any man 
can make, however able and hard-working he 
may be, and the extent of supervision which 
any man can effectively apply, are obviously very 
limited. Organization may accomplish much 
in extending the scope of work possible for an 


UNREGULATED MONOPOLY 


305 


executive; but there is an obvious limit, also, 
to the efficacy of organization; for the success of 
the whole enterprise demands that the executive 
must be able to comprehend all the important 
facts bearing upon the properties. Real effi¬ 
ciency in any business in which conditions are 
ever changing must ultimately depend, in large 
measure, upon the correctness of judgment 
formed from day to day on the problems as 
they arise. And it is an essential of sound judg¬ 
ment that the executives have time to know 
and correlate the facts. 

MERE CHANGE OF MANAGEMENT NO REMEDY 

Men of good judgment must necessarily 
make many errors if they work under the con¬ 
ditions with which the high New Haven officials 
have been confronted during the past eight 
years. If the conditions remain the same, the 
New Haven cannot, by removing present offi¬ 
cials and substituting others, escape from mak¬ 
ing similar errors in the future; nor can we aid 
the matter materially by regulation, state or 
federal. Present ills are due, in the main, to 
the fundamental error of adopting the policy of 
monopoly. The ills can be remedied only by 
abandoning that policy. Present conditions 


306 


BUSINESS —A PROFESSION 


make bad management inevitable. Bad man¬ 
agement of the New Haven can be avoided in 
the future only by changing the controlling con¬ 
ditions under which the properties are to be 
operated; and that involves reducing the so- 
called system to a size consistent with efficiency, 
and subjecting those who manage it to that 
constant incentive and education which come 
from having “to make good” in competitive 
business. 

It has been urged that the so-called New 
Haven system is not too large; and some other 
large railroad systems have been referred to as 
evidence of this. It may be answered, in the 
first place, that none of those systems are mo¬ 
nopolies; and that few of them own any trolleys 
and relatively few are operating steamship lines. 
Furthermore, several of them appear also to 
have exceeded the limit of greatest efficiency. 
But no comparison can properly be made be¬ 
tween other large systems and the so-called 
New Haven system. With a few notable excep¬ 
tions the size of most of the other systems 
was, in the main attained by gradual growth. 
Their main line was built, then extended, and 
branches were constructed in various directions 
in obedience largely to actual necessities of the 
States or of the railroads. Their problems were 


UNREGULATED MONOPOLY 


307 


important and were difficult; but as compared 
with the problems arising from operation in New 
England they were relatively few and simple. 
In the West the same problem is repeated on 
many parts of the line; there a general rule can 
frequently be laid down. Here nearly every grave 
problem is an individual one. New England 
railroading is done in an old and settled com¬ 
munity; the population is congested; and here, 
to a certain extent, conditions became fixed 
even before the days of railroading. 

The great growth of population and of business 
in New England has brought with it many prob¬ 
lems, individual in character, but which are 
nevertheless of a nature to require consideration 
by the high executives. Indeed, this difference 
between the railroad situation in other parts of 
the country and that of the East has been fre¬ 
quently urged by the railroad officials them¬ 
selves. Railroading, to be done efficiently and 
prosperously in New England, must be done far 
more intensively than in newer sections of the 
country. New England railroading may, per¬ 
haps, be likened to our intensive market gar¬ 
dening, or to tobacco growing in the Connecti¬ 
cut valley, in contrast to the big wheat farms of 
the West. 


308 


BUSINESS — A PROFESSION 


ENDING OF MONOPOLY IMPERATIVE 

Even if the size of the so-called New Haven 
system were much reduced, yet the efficient ser¬ 
vice demanded by the public could not be at¬ 
tained so long as a monopoly in transportation 
is permitted to exist. Competition, except in 
purely local traffic, subject to complete regu¬ 
lation as above described, should be intro¬ 
duced so far as possible everywhere. But, as 
above explained, this does not mean rate¬ 
cutting. Competition is not possible every¬ 
where on the New Haven system; but a broad 
field of healthy competition is open to New 
England. Bordering largely on the Atlantic 
Ocean, blessed with fine harbors, we should 
have the full benefit of water competition and 
of the low rates which are consistent with rea¬ 
sonable profit to those engaged in water trans¬ 
portation. Being a thickly settled community, 
we should have the full benefit of competition 
through interurban electrics. The New Haven 
has robbed New England of the benefit both of 
water competition and of trolley competition. 

In order to attain its transportation mo¬ 
nopoly the New Haven bought up at huge cost 
not only competing railroads, but water and 
trolley lines. To secure satisfactory transpor- 


UNREGULATED MONOPOLY 309 

tation conditions in New England, water and 
trolley competition must be reestablished. 
Connecticut, Rhode Island and Massachusetts 
should insist upon separate ownership of rail, 
water and trolley lines, which are naturally 
competitive. 

But the establishment of competing water and 
trolley lines would not afford complete relief. 
Neither steamships nor trolleys could break the 
monopoly in a large part of our traffic. To do 
that railroad competition is essential. To this 
end the Boston and Maine must be completely 
separated from the New Haven. Such separa¬ 
tion would reinstate important competition in 
transportation within the State; and without 
such separation adequate competition is unat¬ 
tainable in the most important interstate traffic; 
for instance, to Chicago, St. Louis and the West. 

Without establishing an important absolutely 
independent railroad system in our community, 
the New Haven and the community will be de¬ 
prived of that opportunity of comparing stand¬ 
ards of operation which is essential to the best 
accomplishment in any department of business. 

Unless the Boston and Maine is separated 
from the New Haven, Massachusetts and 
northern New England will be without a rail¬ 
road system wholly devoted to its interests. 


310 


BUSINESS — A PROFESSION 


LAWS 

The recent decision of the United States Su¬ 
preme Court, holding the Union-Southern Pa¬ 
cific merger illegal, may lead the administration 
to bring proceedings to end this huge New 
Haven monopoly by reinstituting the proceed¬ 
ings commenced in 1908 by President Roosevelt 
and dismissed by the new administration in 
1909, after the Boston Railroad Holding Com¬ 
pany bill was passed. And so far as concerns 
the water lines, relief may also be afforded 
through the Interstate Commerce Commission 
under the provisions of the recent act of 
Congress. 

But proper transportation conditions will 
probably not be secured unless the States also 
take appropriate action. The States can effect 
the separation of the trolley lines. Rhode 
Island seems inclined to acquire and complete 
the railroad line which the Grand Trunk was 
induced by the New Haven to abandon. And 
at present the most certain and expeditious 
method of securing the separation of the Boston 
and Maine from the New Haven appears to be 
for the Commonwealth of Massachusetts to ex¬ 
ercise the right reserved to it in the Massa¬ 
chusetts act of 1909, incorporating the Boston 


UNREGULATED MONOPOLY 


311 


Railroad Holding Company (the New Haven’s 
subsidiary which holds for it the Boston and 
Maine stock). That act provides: 

“The Commonwealth may at any time, by act of 
the Legislature upon one year’s notice, take or re¬ 
quire the securities.” 

The New Haven is clearly bound by the pro¬ 
visions of this statute, as the act expressly 
provides: 

“The acquisition by any railroad corporation . . . 
of any bonds, stocks, notes, or other evidence of in¬ 
debtedness of said Boston Railroad Holding Com¬ 
pany shall be deemed to be an acceptance by said 
railroad corporation of all the terms and provisions 
of this act.” 

The legislature of Massachusetts passed the 
holding company bill upon the assurance of 
Governor Draper and of the Attorney General 
that by so doing the Commonwealth would 
acquire potential control over the Boston and 
Maine. The aggressions of private monopoly 
compel it now to exercise this reserved power 
to take the stock. After the Commonwealth 
has acquired the stock, it may retain the same 
and assume the responsibility of a majority 
owner in a corporation to choose its managing 
officials; or it may transfer the stock under 


312 


BUSINESS — A PROFESSION 


proper safeguards to others, who will operate it 
in the interest of Massachusetts and northern 
New England. But action by the State to take 
over the stock seems necessary now. 

“A condition and not a theory confronts us.” 


AN AID TO RAILROAD EFFICIENCY 1 


The decision of the Interstate Commerce 
Commission having established that there shall 
be no general advance in railroad freight rates, 
the attention of the public should now be di¬ 
rected toward encouraging improvements in 
service and in operating conditions and to 
the development of transportation facilities. 
To this end greater efficiency in management, 
and an ample supply of capital, are necessary. 

Railroading being a private business, the 
corporations must, in order to secure capital 
as well as ability and zeal in management, offer 
the ordinary incentives incident to successful 
private businesses, namely, liberal money re¬ 
wards. Capital or property will yield vastly 
differing returns according to the degree of 
judgment and efficiency applied in manage¬ 
ment. In order to secure efficient administra¬ 
tion of railroads, we must make the rewards 
proportional to the efficiency. The establish- 

1 A statement before the (Hadley) Railroad Securities Commis¬ 
sion, March 6,1911: Published in “Engineering Magazine,”October, 
1911. 


314 


BUSINESS —A PROFESSION 


ment, therefore, of any rule fixing a maximum 
return on capital invested in railroads would 
tend to prevent efficiency by placing a limit 
on achievement. 

To-day even though no fixed maximum 
return is definitely adopted, efficiency in man¬ 
agement is in danger of being punished; whereas 
it should be rewarded. Efficiency is nat¬ 
urally reflected in large net earnings; and as 
no ready means exists for determining whether 
larger net earnings are due to greater efficiency 
in management or to higher rates, large earn¬ 
ings are frequently accepted as evidence that 
rates are too high and lead to demands for 
reduction; when, in fact, the large earnings 
may be due wholly to better management. 
To take from railroad corporations the natural 
fruits of efficiency — that is, greater money 
rewards — must create a sense of injustice 
suffered, which paralyzes effort, invites in¬ 
efficiency and produces slip-shod management. 
The public interest, as well as justice, demands, 
therefore, the due appreciation of greater effi¬ 
ciency in management, and the granting of 
adequate rewards. In other words, private 
capital embarked in a quasi-public business 
ought to receive compensation on a sliding 
scale; so that the greater the service to the 


AID TO RAILROAD EFFICIENCY 315 


public, the greater the profit to those furnishing 
that service. 

Boston applied the sliding-scale system to 
the production and sale of gas. There the divi¬ 
dend to the stockholders rises as the selling 
price to the public is reduced; and that system 
has proved eminently satisfactory both to the 
public and to the investor. The problem pre¬ 
sented in the gas business was so simple that it 
was possible to apply the principle and make 
it operate automatically. The problem in 
railroading is infinitely more difficult, owing 
to the complexities arising from multitudinous 
rates, varying conditions and degrees of ser¬ 
vice and interstate relations. But if the prin¬ 
ciple of the sliding scale is once definitely 
recognized by the Interstate Commerce Com¬ 
mission, State railroad commissions and the 
people, as properly controlling the relations 
between the public and railroad corporations, 
methods will undoubtedly be worked out in 
time by which it can be safely applied. 

The first step in applying the principle of 
the sliding scale must be, however, to devise 
means of determining degrees of efficiency,— 
and that involves determining the unit cost of 
each operation on each railroad. Unless costs 
are so ascertained, no true measure of efficiency 


316 


BUSINESS — A PROFESSION 


can be arrived at. The knowledge that the 
average annual cost per locomotive for repairs, 
renewals and depreciation on one railroad is 
$3832.37 and on another is $2709.27 would be 
a very unsafe ground for determining the rela¬ 
tive economy of operation on the two rail¬ 
roads. The conditions on the two railroads 
and the standards of renewal and depreciation 
may vary so greatly that the company expend¬ 
ing the greater sum may actually have con¬ 
ducted its locomotive use and repair more 
economically and efficiently than the railroad 
expending less. We must reduce each operation 
to its ultimate unit and ascertain the cost of 
that before a proper basis of comparison can be 
secured. We must learn not merely the cost 
of turning a wheel of a standard size and char¬ 
acter, the cost of laying a tie or a rail under 
standard conditions; but even these relatively 
simple operations must be again analyzed and 
separated into their component elements before 
a safe basis of relative costs can be arrived at. 

The fact that railroads are subject in their 
accounting to the orders of the Interstate Com¬ 
merce Commission makes it possible to require 
that each company should ascertain and report 
to the commission the ultimate unit costs of 
each operation in each department of the rail- 


AID TO RAILROAD EFFICIENCY 317 


road. The further fact that the railroad 
business is largely non-competitive, makes it 
proper to publish these costs and to give to 
each railroad the benefit of knowing the lowest 
unit cost of each operation attained by any 
railroad and how it was attained. 

To aid in this work the Interstate Com¬ 
merce Commission should establish a Bureau 
of Railroad Costs by which the ascertainment 
of costs may be supervised and the results 
analyzed, classified and compared. Knowledge 
of the best methods would thus become the 
common property of railroad men. That alone 
would lead directly to great advances in effi¬ 
ciency and economy. But the adoption of the 
best existing methods would be merely the 
beginning of the great advance. The ascer¬ 
tainment of the lowest existing costs would 
inevitably be followed by widespread striving 
to eliminate further waste of time, effort and 
material and to find ever better methods. 
With the introduction of exact tests of effi¬ 
ciency, with the establishment of dependable 
standards of comparison, railroad operation 
would soon develop into a recognized profes¬ 
sion; and those who pursue it would be stimu¬ 
lated like scientists and engineers to ever higher 
achievements. 


318 


BUSINESS —A PROFESSION 


There should be established also an Ex¬ 
periment Station in Railroad Efficiency. Such 
a station could be conducted similarly to the 
Agricultural experiment stations and the Office 
of Roads in the Department of Agriculture. 
The former has been potent in raising the stan¬ 
dard in agriculture; the latter has advanced 
road-building throughout the United States. 
The cooperation of the government in fur¬ 
thering railroad efficiency would be no less 
effective. The Bureau would undoubtedly 
develop valuable inventions and discoveries 
in its own laboratories, as the various exper¬ 
iment stations of the Agricultural Department 
have done. But it would be of even greater 
service in testing the inventions made and 
methods suggested by others; and it could 
bring those of especial value to the attention 
of the railroads. Hundreds of inventions, 
hundreds of new methods which, if adopted, 
would enhance the efficiency of railroad oper¬ 
ation, and introduce economies of wide scope, 
have remained unused, because they are not 
known to the operating men. Many of these 
inventions are not now in use merely because 
no single railroad was willing to give the time 
or incur the expense of testing their value; 
many because the inventor or discoverer was 


AID TO RAILROAD EFFICIENCY 319 


unable to secure a hearing or a fair test. There 
are undoubtedly also a large number of devices 
and methods in use in foreign countries of 
which our railway managers have either no 
knowledge or have but inadequate information. 

It is a proper function of our government 
to make such investigations and to give to the 
railroads the benefit thereof. The railroads are 
the greatest single industry in the United 
States next to agriculture. The interest of the 
general public to secure efficient and econo¬ 
mical transportation is so great that the govern¬ 
ment would be fully justified in incurring any 
reasonable expense to aid in increasing rail¬ 
road efficiency. And in view of the obligations 
already assumed by the government in the reg¬ 
ulation of railroad rates and service, it should 
proceed now to thus lend its aid to the rail¬ 
roads, securing to them greater justice by per¬ 
mitting them to enjoy earnings on capital in pro¬ 
portion to the efficiency of their management. 


INTERLOCKING DIRECTORS 1 


Mr. Chairman , Ladies and Gentlemen: — 

Mr. Wilcox, in his interesting paper, has laid 
down certain fundamental planks which should 
govern the adjustment of relations between the 
community and privately owned public service 
corporations. But, as Mr. Taylor has indicated, 
those fundamental planks should rest upon jus¬ 
tice. And justice can be attained only by a care¬ 
ful regard for fundamental facts, since justice is 
but truth in action. What those fundamental 
facts are has been suggested in the very inform¬ 
ing paper which Mr. Palmer has just read. They 
are primarily: (i) the facts relating to the cost of 
the plant, and (2) the facts relating to the cost of 
operation. We must have, in order to ascertain 
those facts, knowledge that is not only accurate, 
but comprehensive. The instances which he 
gave, notably the data in regard to nitrogen lamps, 
show that facts, in order to be useful, must also 
be up-to-date. As Matthew Arnold said: “Erro¬ 
neous decisions are more often due to lack of 
recent information than to errors in reasoning.” 

1 Reprinted from “The Annals” of the American Academy of 
Political and Social Science, Philadelphia, January, 1915. 


INTERLOCKING DIRECTORS 


321 


Mr. Palmer has also pointed out most clearly 
how such comprehensive information is to be ob¬ 
tained. It can be done only through a properly 
equipped bureau; and that bureau must work in 
cooperation with all those interested. Such 
cooperation has in the past existed, and very 
properly, between the public utilities companies. 
These have long had their associations, and the 
associations have no doubt aided greatly in pro¬ 
moting the efficiency and prosperity of the sepa¬ 
rate organizations. But the communities served 
have hitherto had no means of cooperation. The 
Utilities Bureau recently inaugurated by mayors 
of great cities will furnish the instrument through 
which cooperation of municipalities may become 
effective. It points the way to efficiency and to 
justice and must prove of great benefit to all 
American cities. 

But in addition to providing means for ascer¬ 
taining facts and for disseminating the knowledge 
gained, it is necessary to establish conditions 
under which the machinery of the Utilities Bureau 
can operate efficiently. We must, in other words, 
have conditions consistent with the ascertainment 
and appreciation of the truth. 

In connection with these public utility problems 
there is much talk about stock watering. To my 
mind the real objection to stock watering is not 


322 


BUSINESS—A PROFESSION 


that those who enter upon these enterprises get 
too large a return. Mr. Guernsey is entirely right 
in saying that those who put their money into 
public utility projects should receive as large a 
return as in other business enterprises involving 
a like risk. For capital, risk and ability applied 
to public service corporations must be paid for at 
market rates. The public interest demands that 
the rewards should be adequate; otherwise the 
requisite capital, zeal and ability cannot be se¬ 
cured. My objection, therefore, to stock water¬ 
ing is not that men have thereby obtained in 
many instances a very large return, but that 
stock watering tends to obscure the truth. It 
hides the actual facts as to the amount invested. 
No doubt promoters of enterprises have often re¬ 
sorted to stock watering for the purpose of mis¬ 
leading the general and the investing public; but 
in a very large number, perhaps in most cases, 
the motive has been mistrust of the public. That 
is, the stock watering device was resorted to be¬ 
cause promoters believed that the public would 
not, if the actual facts were known, allow a just 
return; because (if the enterprise proved success¬ 
ful) they would ignore the risks which had been 
taken. Of course the risk incurred is a most im¬ 
portant element in determining what the return 
upon an investment should be. With the estab- 


INTERLOCKING DIRECTORS 323 

lishment of the Utilities Bureau which can au¬ 
thoritatively supply the facts to the public, much 
of the incentive for stock watering would be 
removed. 

There is another corporate practice which also 
tends to obscure the truth: interlocking direc¬ 
torates. They are an obstacle to knowledge of 
fundamental facts, because the existence of the 
interlocking robs an enterprise of those condi¬ 
tions which under the general laws of business 
ordinarily lead to the ascertainment of true values. 
Ordinarily in business the value of a thing or 
service is determined through the agreement 
reached by an intelligent seller and an intelligent 
purchaser — each looking out for his own in¬ 
terest to the best of his ability. Where interlock¬ 
ing directorates or other conflicting interests exist, 
this protection is lost. 

The first step in any enterprise, after it is 
planned, is the getting of money. Under inter¬ 
locking directorate practice, the same man acting 
as banker sells to himself acting as the public 
utilities corporation the money with which that 
corporation is to be established. Then that same 
man, acting as public utilities corporation, buys 
from himself, acting as electrical manufacturer, 
the apparatus which is to be used. Then the 
same man, having thus bought the apparatus as 


324 


BUSINESS—A PROFESSION 


public service corporation, contracts with him¬ 
self acting as construction company for the build¬ 
ing of the plant. Then the same man, having 
completed the construction of his plant, and 
being ready as public service corporation for 
business, contracts with himself as supply house, 
for the supplies. And finally this same man, 
having gotten ready for business as public 
service corporation, enters into a special con¬ 
tract for power with himself as manufacturer. 
Now, it is obvious that if the fundamental basis 
of business is correct, there should be in every 
trade two sides: men should deal with each other 
at arm’s length; and what are the best prices, 
what are the best results, should be determined 
by the exercise of two independent minds repre¬ 
senting the conflicting interests. The old law 
that “No man can serve two masters” properly 
is as applicable today as it was twenty centuries 
ago. 

There is another reason why interlocking direc¬ 
torates must be abolished: namely, the demands 
of efficiency. Obviously the only justification for 
the director’s existence is that he should direct; 
which means that he should be an absolutely fair 
and intelligent adviser and critic of the enterprise. 
The men who are in charge of an enterprise as 
executive officers are supposed to manage, and 


INTERLOCKING DIRECTORS 


325 


to possess the required energy and determination 
to go forward. But in a well-equipped organiza¬ 
tion there should be men who will check up the 
manager’s judgment and performance. Only in 
this way can continued prosperity be assured. 

For the proper exercise of the functions of 
director, it is essential that he be disinterested; 
that is, be free from any conflicting interest. But 
it is also essential that he have knowledge. Facts, 
facts, facts, are the only basis on which he can 
properly exercise his judgment. It is as necessary 
that he know intimately the facts concerning the 
business, as that he have only one interest to 
subserve. Now, no man can have such detailed 
knowledge of the facts of many enterprises. This 
is due to the limitations of time and place and to 
those other limits set by nature upon human in¬ 
telligence. How can one man know in respect to 
many large corporations the facts which a director 
needs to know in order to insure efficient manage¬ 
ment? Though improper motives contributed to 
the New Haven tragedy, the main cause of the 
stockholders’ misfortune appears to have been 
the directors’ ignorance; and this ignorance was 
no doubt largely due to the fact that the same 
men who were its directors held like offices in a 
multitude of other corporations. 

If there were no other reasons against the 


326 


BUSINESS—A PROFESSION 


practice of interlocking directorates the demands 
of efficiency alone would call for its abolition. 
But there are other reasons; and there is one 
other reason which has broad application here. 
It is this: We must have not only a knowledge of 
facts as a basis for doing justice, but we must 
have conditions under which truth may properly 
function. We must seek to isolate truth so as to 
free it from the operation of those forces which 
would cause a deviation from the true path. Such 
forces operate sometimes through compulsion, 
sometimes through influence. We cannot expect 
to have justice done unless we have a mind that 
is free to act on such facts as may be presented. 
We must, therefore, to secure just dealings with 
public service corporations, see to it that there 
does not arise in the community affected condi¬ 
tions by which those representing the public are 
consciously or unconsciously warped in their 
judgment. 

To my mind the gravest objection to the prac¬ 
tice of interlocking directorates is that it has 
created financial power so great that even the 
best men have found themselves unduly in¬ 
fluenced. Such undoubtedly was true in respect 
to many of the New Haven’s operations. There 
through the interlocking of banks, bankers, in¬ 
surance and trust companies, railroads, steamship 


INTERLOCKING DIRECTORS 


327 


lines, public service corporations, equipment and 
other manufacturing companies, a power was 
created so great that the intelligence, will, and 
character of individuals were powerless to resist it. 

What shall we do to meet this situation? Con¬ 
gress, in the Clayton Act, recently passed, has 
indicated one of the things that should be done. 
It has declared that the practice of railroads, in 
purchasing, whether it be money or supplies, or 
construction, or any other of the elements enter¬ 
ing into the building and operation of its proper¬ 
ties, from concerns in which its own officers or 
directors or purchasing agents are concerned, 
shall cease; and the law makes such transactions 
a misdemeanor, excepting in those instances where 
they are trifling in the aggregate, or where the 
transaction is effected upon competitive bids and 
under a condition prescribed by the Interstate 
Commerce Commission, under rifles which would 
make public all facts. The provisions in regard 
to this competition are such that there is little 
likelihood that its privileges will be availed of. 

One measure to be recommended for ending 
interlocking directorates in public utility enter¬ 
prises is state legislation of similar character. 
Another is to develop and utilize the Utilities 
Bureau. But the great influence which results 
from this interlocking of relations of the finan- 


328 


BUSINESS—A PROFESSION 


ciers can be fully met only through the wide¬ 
spread cooperation of our municipalities. Let us 
meet financial combinations by municipal coopera¬ 
tion. When that is done, and not until then, shall 
we have the conditions under which justice can 
be done to capital and to the community alike. 


THE OPPORTUNITY IN THE LAW 1 


I assume that in asking me to talk to you on 
the Ethics of the Legal Profession, you do not 
wish me to enter upon a discussion of the rela¬ 
tion of law to morals, or to attempt to ac¬ 
quaint you with those detailed rules of ethics 
which lawyers have occasion to apply from day 
to day in their practice. What you want is 
this: Standing not far from the threshold of 
active life, feeling the generous impulse for 
service which the University fosters, you wish 
to know whether the legal profession would 
afford you special opportunities for useful¬ 
ness to your fellow-men, and, if so, what the 
obligations and limitations are which it im¬ 
poses. I say special opportunities, because 
every legitimate occupation, be it profession or 
business or trade, furnishes abundant oppor¬ 
tunities for usefulness, if pursued in what 
Matthew Arnold called “the grand manner.” 
It is, as a rule, far more important how men 
pursue their occupation than what the occu¬ 
pation is which they select. 

1 An address delivered May 4, 1905, at Phillips Brooks House, 
before the Harvard Ethical Society. 


330 


BUSINESS —A PROFESSION 


But the legal profession does afford in Amer¬ 
ica unusual opportunities for usefulness. That 
this has been so in the past, no one acquainted 
with the history of our institutions can for a 
moment doubt. The great achievement of the 
English-speaking people is the attainment of 
liberty through law. It is natural, therefore, 
that those who have been trained in the law 
should have borne an important part in that 
struggle for liberty and in the government which 
resulted. Accordingly, we find that in Amer¬ 
ica the lawyer was in the earlier period almost 
omnipresent in the State. Nearly every great 
lawyer was then a statesman; and nearly 
every statesman, great or small, was a lawyer. 
DeTocqueville, the first important foreign ob¬ 
server of American political institutions, said of 
the United States seventy-five years ago: 


“In America there are no nobles or literary men, 
and the people are apt to mistrust the wealthy; 
lawyers, consequently, form the highest political 
class. ... As the lawyers form the only enlightened 
class whom the people do not mistrust, they are natu¬ 
rally called upon to occupy most of the public stations. 
They fill the legislative assemblies and are at the head 
of the administration; they consequently exercise a 
powerful influence upon the formation of the law and 
upon its execution.” 


OPPORTUNITY IN THE LAW 


331 


For centuries before the American Revolution 
the lawyer had played an important part in 
England. His importance in the State became 
much greater in America. One reason for this, 
as DeTocqueville indicated, was the fact that 
we possessed no class like the nobles, which 
took part in government through privilege. A 
more potent reason was that with the introduc¬ 
tion of a written constitution the law became 
with us a far more important factor in the 
ordinary conduct of political life than it did in 
England. Legal questions were constantly aris¬ 
ing and the lawyer was necessary to settle them. 
But I take it the paramount reason why the 
lawyer has played so large a part in our political 
life is that his training fits him especially to 
grapple with the questions which are presented 
in a democracy. 

The whole training of the lawyer leads to the 
development of judgment. His early training— 
his work with books in the study of legal rules 
— teaches him patient research and develops 
both the memory and the reasoning faculties. 
He becomes practised in logic; and yet the use 
of the reasoning faculties in the study of law 
is very different from their use, say, in meta¬ 
physics. The lawyer’s processes of reasoning, 
his logical conclusions, are being constantly 


332 


BUSINESS — A PROFESSION 


tested by experience. He is running up against 
facts at every point. Indeed it is a maxim 
of the law: Out of the facts grows the law; 
that is, propositions are not considered ab¬ 
stractly, but always with reference to facts. 

Furthermore, in the investigation of the facts 
the lawyer differs very materially from the 
scientist or the scholar. The lawyer’s investi¬ 
gations into the facts are limited by time and 
space. His investigations have reference al¬ 
ways to some practical end. Unlike the scien¬ 
tist, he ordinarily cannot refuse to reach a 
conclusion on the ground that he lacks the 
facts sufficient to enable one to form an opinion. 
He must form an opinion from those facts which 
he has gathered; he must reason from the facts 
within his grasp. 

If the lawyer’s practice is a general one, his 
field of observation extends, in course of time, 
into almost every sphere of business and of life. 
The facts so gathered ripen his judgment. 
His memory is trained to retentiveness. His 
mind becomes practised in discrimination as well 
as in generalization. He is an observer of men 
even more than of things. He not only sees 
men of all kinds, but knows their deepest secrets; 
sees them in situations which “try men’s souls.” 
He is apt to become a good judge of men. 


OPPORTUNITY IN THE LAW 


333 


Then, contrary to what might seem to be the 
habit of the lawyer's mind, the practice of law 
tends to make the lawyer judicial in attitude 
and extremely tolerant. His profession rests 
upon the postulate that no contested question 
can be properly decided until both sides are 
heard. His experience teaches him that nearly 
every question has two sides; and very often 
he finds — after decision of judge or jury — 
that both he and his opponent were in the 
wrong. The practice of law creates thus a 
habit of mind, and leads to attainments which 
are distinctly different from those developed in 
most professions or outside of the professions. 
These are the reasons why the lawyer has ac¬ 
quired a position materially different from that 
of other men. It is the position of the adviser 
of men. 

Your chairman said: “People have the im¬ 
pression to-day that the lawyer has become 
mercenary." It is true that the lawyer has 
become largely a part of the business world. 
Mr. Bryce said twenty years ago when he com¬ 
pared the America of 1885 with the America 
of DeTocqueville: 

“ Taking a general survey of the facts of to-day, 
as compared with the facts of sixty years ago, it is 
clear that the Bar counts for less as a guiding and re- 


334 


BUSINESS —A PROFESSION 


straining power, tempering the crudity or haste of 
democracy by its attachment to rule and precedent, 
than it did.” 

And in reviewing American conditions after 
his recent visit Mr. Bryce said: 

“Lawyers are now to a greater extent than for¬ 
merly business men, a part of the great organized 
system of industrial and financial enterprise. They 
are less than formerly the students of a particular kind 
of learning, the practitioners of a particular art. And 
they do not seem to be so much of a distinct profes¬ 
sional class.” 

That statement was made by a very sympa¬ 
thetic observer of American institutions; but it 
is clear that Mr. Bryce coincides in the view 
commonly expressed, that the Bar had become 
commercialized through its connection with 
business. I am inclined to think that this view 
is not altogether correct. Probably business 
has become professionalized as much as the 
Bar has become commercialized. Is it not this 
which has made the lawyer so important a part 
of the business world? 

The ordinary man thinks of the Bar as a body 
of men who are trying cases, perhaps even 
trying criminal cases. Of course there is an 
immense amount of litigation going on; and a 
great deal of the time of many lawyers is de- 


OPPORTUNITY IN THE LAW 335 

voted to litigation. But by far the greater part 
of the work done by lawyers is done not in 
court, but in advising men on important mat¬ 
ters, and mainly in business affairs. In guid¬ 
ing these affairs industrial and financial, lawyers 
are needed, not only because of the legal ques¬ 
tions involved, but because the particular men¬ 
tal attributes and attainments which the legal 
profession develops are demanded in the proper 
handling of these large financial or industrial 
affairs. The magnitude and scope of these 
operations remove them almost wholly from 
the realm of “petty trafficking’ 7 which people 
formerly used to associate with trade. The 
questions which arise are more nearly questions 
of statesmanship. The relations created call 
in many instances for the exercise of the high¬ 
est diplomacy. The magnitude, difficulty and 
importance of the problems involved are often 
as great as in the matters of state with which 
lawyers were formerly frequently associated. 
The questions appear in a different guise; but 
they are similar. The relations between rival 
railroad systems are like the relations between 
neighboring kingdoms. The relations of the 
great trusts to the consumers or to their em¬ 
ployees is like that of feudal lords to com¬ 
moners or dependents. The relations of public- 


BUSINESS —A PROFESSION 


service corporations to the people raise ques¬ 
tions not unlike those presented by the monop¬ 
olies of old. 

So some of the ablest American lawyers of 
this generation, after acting as professional ad¬ 
visers of great corporations, have become finally 
their managers. The controlling intellect of 
the great Atchison Railroad System, its vice- 
president, Mr. Victor Morawetz, graduated at 
the Harvard Law School about twenty-five 
years ago, and shortly afterward attained 
distinction by writing an extraordinarily good 
book on the Law of Corporations. The head of 
the great Bell Telephone System of the United 
States, Mr. Frederick P. Fish, was at the time 
of his appointment to that office probably our 
leading patent lawyer. In the same way, and for 
the same reason, lawyers have entered into the 
world of finance. Mr. James J. Storrow, who 
was a law partner of Mr. Fish, has become a 
leading member of the old banking firm of Lee, 
Higginson & Co. A former law partner of Mr. 
Morawetz, Mr. Charles Steele, became a mem¬ 
ber of the firm of J. P. Morgan & Co. Their 
legal training was called for in the business world, 
because business has tended to become profes¬ 
sionalized. And thus, although the lawyer is 
not playing in affairs of state the part he once 


OPPORTUNITY IN THE LAW 337 

did, his influence is, or at all events may be, 
quite as important as it ever was in the United 
States; and it is simply a question how that 
influence is to be exerted. 

It is true that at the present time the lawyer 
does not hold as high a position with the people 
as he held seventy-five or indeed fifty years 
ago; but the reason is not lack of opportunity. 
It is this: Instead of holding a position of inde¬ 
pendence, between the wealthy and the people, 
prepared to curb the excesses of either, able 
lawyers have, to a large extent, allowed them¬ 
selves to become adjuncts of great corpora¬ 
tions and have neglected the obligation to use 
their powers for the protection of the people. 
We hear much of the “corporation lawyer,” and 
far too little of the “people’s lawyer.” The 
great opportunity of the American Bar is and 
will be to stand again as it did in the past, ready 
to protect also the interests of the people. 

Mr. Bryce, in discussing our Bar, said, in his 
“ American Commonwealth”: 

“But I am bound to add that some judicious 
American observers hold that the last thirty years have 
witnessed a certain decadence in the Bar of the great 
cities. They say that the growth of the enormously 
rich and powerful corporations willing to pay vast 
sums for questionable services has seduced the virtue 


BUSINESS — A PROFESSION 


of some counsel whose eminence makes their example 
important.” 

The leading lawyers of the United States 
have been engaged mainly in supporting the 
claims of the corporations; often in endeav¬ 
oring to evade or nullify the extremely crude 
laws by which legislators sought to regulate 
the power or curb the excesses of corporations. 

Such questions as the regulation of trusts, 
the fixing of railway rates, the municipaliza¬ 
tion of public utilities, the relation between 
capital and labor, call for the exercise of legal 
ability of the highest order. Up to the present 
time the legal ability of a high order which has 
been expended on those questions has been al¬ 
most wholly in opposition to the contentions 
of the people. The leaders of the Bar, without 
any preconceived intent on their part, and 
rather as an incident to their professional 
standing, have, with rare exceptions, been 
ranged on the side of the corporations, and the 
people have been represented, in the main, by 
men of very meagre legal ability. 

If these problems are to be settled right, this 
condition cannot continue. Our country is, 
after all, not a country of dollars, but of bal¬ 
lots. The immense corporate wealth will neces¬ 
sarily develop a hostility from which much 


OPPORTUNITY IN THE LAW 


339 


trouble will come to us unless the excesses of 
capital are curbed, through the respect for law, 
a? the excesses of democracy were curbed 
seventy-five years ago. There will come a 
revolt of the people against the capitalists, 
unless the aspirations of the people are given 
some adequate legal expression; and to this end 
cooperation of the abler lawyers is essential. 

For nearly a generation the leaders of the 
Bar have, with few exceptions, not only failed 
to take part in constructive legislation de¬ 
signed to solve in the public interest our 
great social, economic and industrial prob¬ 
lems; but they have failed likewise to oppose 
legislation prompted by selfish interests. They 
have often gone further in disregard of com¬ 
mon weal. They have often advocated, as 
lawyers, legislative measures which as citizens 
they could not approve, and have endeavored 
to justify themselves by a false analogy. They 
have erroneously assumed that the rule of 
ethics to be applied to a lawyer’s advocacy is 
the same where he acts for private interests 
against the public, as it is in litigation between 
private individuals. 

The ethical question which laymen most fre¬ 
quently ask about the legal profession is this: 
How can a lawyer take a case which he does not 


340 


BUSINESS —A PROFESSION 


believe in? The profession is regarded as neces¬ 
sarily somewhat immoral, because its members 
are supposed to be habitually taking cases 
of that character. As a practical matter, 
the lawyer is not often harassed by this 
problem; partly because he is apt to believe, 
at the time, in most of the cases that he actu¬ 
ally tries; and partly because he either abandons 
or settles a large number of those he does not 
believe in. But the lawyer recognizes that in 
trying a case his prime duty is to present his 
side to the tribunal fairly and as well as he 
can, relying upon his adversary to present the 
other side fairly and as well as he can. Since 
the lawyers on the two sides are usually reason¬ 
ably well matched, the judge or jury may or¬ 
dinarily be trusted to make such a decision as 
justice demands. 

But when lawyers act upon the same prin¬ 
ciple in supporting the attempts of their private 
clients to secure or to oppose legislation, a very 
different condition is presented. In the first 
place, the counsel selected to represent im¬ 
portant private interests possesses usually 
ability of a high order, while the public is often 
inadequately represented or wholly unrepre¬ 
sented. Great unfairness to the public is apt 
to result from this fact. Many bills pass in 


OPPORTUNITY IN THE LAW 341 

our legislatures which would not have be¬ 
come law, if the public interest had been fairly 
represented; and many good bills are defeated 
which if supported by able lawyers would have 
been enacted. Lawyers have, as a rule, failed 
to consider this distinction between practice 
in courts involving only private interests, and 
practice before the legislature or city council 
involving public interests. Some men of high 
professional standing have even endeavored to 
justify their course in advocating professionally 
legislation which in their character as citizens 
they would have voted against. 

Furthermore, lawyers of high standing have 
often failed to apply in connection with pro¬ 
fessional work before the legislature or city 
council a rule of ethics which they would deem 
imperative in practice before the court. Lawyers 
who would indignantly retire from a court case 
in the justice of which they believed, if they 
had reason to think that a juror had been bribed 
or a witness had been suborned by their client, 
are content to serve their client by honest ar¬ 
guments before a legislative committee, although 
they have as great reason to believe that their 
client has bribed members of the legislature or 
corrupted public opinion. This confusion of 
ethical ideas is an important reason why the 


342 


BUSINESS —A PROFESSION 


Bar does not now hold the position which it 
formerly did as a brake upon democracy, and 
which I believe it must take again if the serious 
questions now before us are to be properly 
solved. 

Here, consequently, is the great opportunity 
in the law. The next generation must witness 
a continuing and ever-increasing contest be¬ 
tween those who have and those who have not. 
The industrial world is in a state of ferment. 
The ferment is in the main peaceful, and, to a 
considerable extent, silent; but there is felt 
to-day very widely the inconsistency in this 
condition of political democracy and industrial 
absolutism. The people are beginning to doubt 
whether in the long run democracy and abso¬ 
lutism can co-exist in the same community; 
beginning to doubt whether there is a justifi¬ 
cation for the great inequalities in the distri¬ 
bution of wealth, for the rapid creation of 
fortunes, more mysterious than the deeds of 
Aladdin’s lamp. The people have begun to 
think; and they show evidences on all sides 
of a tendency to act. Those of you who have 
not had an opportunity of talking much with 
laboring men can hardly form a conception of 
the amount of thinking that they are doing. 
With many these problems are all-absorbing. 


OPPORTUNITY IN THE LAW 


343 


Many workingmen, otherwise uneducated, talk 
about the relation of employer and employee far 
more intelligently than most of the best edu¬ 
cated men in the community. The labor 
question involves for them the whole of life, 
and they must in the course of a comparatively 
short time realize the power which lies in them. 
Often their leaders are men of signal ability, 
men who can hold their own in discussion or in 
action with the ablest and best-educated men 
in the community. The labor movement must 
necessarily progress. The people’s thought will 
take shape in action; and it lies with us, with 
you to whom in part the future belongs, to say 
on what lines the action is to be expressed; 
whether it is to be expressed wisely and tem¬ 
perately, or wildly and intemperately; whether 
it is to be expressed on lines of evolution or on 
lines of revolution. Nothing can better fit you 
for taking part in the solution of these problems, 
than the study and preeminently the practice 
of law. Those of you who feel drawn to that 
profession may rest assured that you will find 
in it an opportunity for usefulness which is 
probably unequalled. There is a call upon the 
legal profession to do a great work for this 
country. 


THE LIVING LAW 1 


The history of the United States, since the 
adoption of the constitution, covers less than 128 
years. Yet in that short period the American 
ideal of government has been greatly modified. 
At first our ideal was expressed as “A govern¬ 
ment of laws and not of men.” Then it became 
“A government of the people, by the people, for 
the people.” Now it is “Democracy and social 
justice.” 

In the last half century our democracy has 
deepened. Coincidentally there has been a shift¬ 
ing of our longing from legal justice to social 
justice, and — it must be admitted — also a 
waning respect for law. Is there any causal con¬ 
nection between the shifting of our longing from 
legal justice to social justice and waning respect 
for law? If so, was that result unavoidable? 

Many different causes contributed to this wan¬ 
ing respect for law. Some related specifically to 
the lawyer, some to the courts and some to the 
substantive law itself. The lessening of the 

1 An address delivered before the Chicago Bar Association, 
January 3, 1916. 


THE LIVING LAW 


345 


lawyers influence in the community came first. 
James Bryce called attention to this as a fact of 
great significance, already a generation ago. 
Later criticism of the efficiency of our judicial 
machinery became widespread. Finally, the law 
as administered was challenged — a challenge 
which expressed itself vehemently a few years 
ago in the demand for recall of judges and of 
judicial decisions. 

Many different remedies must be applied before 
the ground lost can be fully recovered and the 
domain of law extended further. The causes and 
the remedies have received perhaps their most 
helpful discussion from three lawyers whom we 
associate with Chicago: Professor Roscoe Pound, 
recently secured for Harvard, who stands pre¬ 
eminently in service in this connection; Pro¬ 
fessor Wigmore; and Professor Freund. Another 
Chicago Professor, who was not a lawyer but a 
sociologist, the late Charles R. Henderson, has 
aided much by intelligent criticism. No court in 
America has in the last generation done such 
notable pioneer work in removing the causes of 
criticism as your own Municipal Court under its 
distinguished Chief Justice, Harry Olson. And 
the American Judicature Society, under the effi¬ 
cient management of Mr. Herbert Harley, is 
stimulating thought and action throughout the 


346 


BUSINESS —A PROFESSION 


country by its dissemination of what is being 
done and should be done in aid of the reform of 
our judicial system. 

The important contribution which Chicago has 
made in this connection makes me wish to discuss 
before you a small part of this large problem. 

The Challenge of Existing Law . The challenge 
of existing law is not a manifestation peculiar to 
our country or to our time. Sporadic dissatis¬ 
faction has doubtless existed in every country at 
all times. Such dissatisfaction has usually been 
treated by those who govern as evidencing the 
unreasonableness of law breakers. The line “No 
thief e’er felt the halter draw with good opinion 
of the law,” expresses the traditional attitude of 
those who are apt to regard existing law as “the 
true embodiment of everything that’s excellent.” 
It required the joint forces of Sir Samuel Romilly 
and Jeremy Bentham to make clear to a humane, 
enlightened and liberty-loving England that death 
was not the natural and proper punishment for 
theft. Still another century had to elapse before 
social science raised the doubt whether theft was 
not perhaps as much the fault of the community 
as of the individual. 

Earlier Challenges. In periods of rapid trans¬ 
formation, challenge of existing law, instead of 
being sporadic, becomes general. Such was the 


THE LIVING LAW 


347 


case in Athens twenty-four centuries ago, when 
Euripides burst out in flaming words against 
“the trammelings of law which are not of the 
right. 5 ’ Such was the case also in Germany dur¬ 
ing the Reformation, when Ulrich Zasius declared 
that “All sciences have put off their dirty clothes, 
only jurisprudence remains in its rags.” 

And after the French Revolution another pe¬ 
riod of rapid transformation, another poet-sage, 
Goethe, imbued with the modem scientific spirit, 
added to his protest a clear diagnosis of the 
disease: 

“ Customs and laws, in every place 
Like a disease, an heirloom dread, 

Still trace their curse from race to race, 

And furtively abroad they spread. 

To nonsense, reasons self they turn; 

Beneficence becomes a pest; 

Woe unto thee, thou art a grandson bom! 

As for the law, born with us, unexpressed 
That law, alas, none careth to discern.” 

The Industrial Revolution. Is not Goethe’s 
diagnosis applicable to the twentieth-century 
challenge of the law in the United States? Has 
not the recent dissatisfaction with our law as 
administered been due, in large measure, to the 
fact that it had not kept pace with the rapid de¬ 
velopment of our political, economic and social 
ideals? In other words, is not the challenge of 


348 


BUSINESS —A PROFESSION 


legal justice due to its failure to conform to con¬ 
temporary conceptions of social justice? 

Since the adoption of the federal constitution, 
and notably within the last fifty years, we have 
passed through an economic and social revolution 
which affected the life of the people more funda¬ 
mentally than any political revolution known to 
history. Widespread substitution of machinery 
for hand labor (thus multiplying a hundredfold 
man’s productivity), and the annihilation of 
space through steam and electricity, have wrought 
changes in the conditions of life which are in 
many respects greater than those which had oc¬ 
curred in civilized countries during thousands of 
years preceding. The end was put to legalized 
human slavery — an institution which had ex¬ 
isted since the dawn of history. But of vastly 
greater influence upon the lives of the great ma¬ 
jority of all civilized peoples was the possibility 
which invention and discovery created of eman¬ 
cipating women and of liberating men called free 
from the excessive toil theretofore required to 
secure food, clothing and shelter. Yet, while in¬ 
vention and discovery created the possibility of 
releasing men and women from the thraldom of 
drudgery, there actually came, with the introduc¬ 
tion of the factory system and the development 
of the business corporation, new dangers to liberty. 


THE LIVING LAW 


349 


Large publicly owned corporations replaced small 
privately owned concerns. Ownership of the 
instruments of production passed from the work¬ 
man to the employer. Individual personal rela¬ 
tions between the proprietor and his help ceased. 
The individual contract of service lost its char¬ 
acter, because of the inequality in position 
between employer and employee. The group 
relation of employee to employer with collective 
bargaining became common, for it was essential 
to the workers’ protection. 

Legal Science Static. Political as well as eco¬ 
nomic and social science noted these revolutionary 
changes. But legal science — the unwritten or 
judge-made laws as distinguished from legisla¬ 
tion— was largely deaf and blind to them. 
Courts continued to ignore newly arisen social 
needs. They applied complacently 18th century 
conceptions of the liberty of the individual and 
of the sacredness of private property. Early 
19th century scientific half-truths, like “The sur¬ 
vival of the fittest,” which translated into prac¬ 
tice meant “The devil take the hindmost,” were 
erected by judicial sanction into a moral law. 
Where statutes giving expression to the new social 
spirit were clearly constitutional, judges, imbued 
with the relentless spirit of individualism, often 
construed them away. Where any doubt as to 


350 


BUSINESS —A PROFESSION 


the constitutionality of such statutes could find 
lodgment, courts all too frequently declared the 
acts void. Also in other countries the strain 
upon the law has been great during the last gen¬ 
eration, because there also the period has been 
one of rapid transformation; and the law has 
everywhere a tendency to lag behind the facts of 
life. But in America the strain became dangerous, 
because constitutional limitations were invoked 
to stop the natural vent of legislation. In the 
course of relatively few years hundreds of statutes 
which embodied attempts (often very crude) to 
adjust legal rights to the demands of social jus¬ 
tice were nullified by the courts, on the grounds 
that the statutes violated the constitutional guar¬ 
anties of liberty or property. Small wonder that 
there arose a clamor for the recall of judges and 
of judicial decisions and that demand was made 
for amendment of the constitutions and even for 
their complete abolition. The assaults upon 
courts and constitutions culminated in 1912. 
They centered about two decisions: the Lochner 
case, 1 in which a majority of the judges of the 
Supreme Court of the United States had declared 
void a New York law limiting the hours of labor 
for bakers, and the Ives case, 2 in which the New 

1 Lochner v. New York, 198 U. S. 45. 

2 Ives v. South Buffalo Ry. Co., 201 N. Y. 271. 


THE LIVING LAW 


351 


York Court of Appeals had unanimously held 
void its accident compensation law. 

The Two Ritchie Cases . Since 1912, the fury 
against the courts has abated. This change in 
the attitude of the public toward the courts is 
due not to any modification in judicial tenure, 
not to amendment of the constitutions, but to 
the movement, begun some years prior to 1912, 
which has more recently resulted in a better ap¬ 
preciation by the courts of existing social needs. 

In 1895 your Supreme Court held in the first 
Ritchie case 1 that the eight-hour law for women 
engaged in manufacturing was unconstitutional. 
In 1908 the United States Supreme Court held in 
Muller v. Oregon 2 that the Women’s Ten-Hour 
Law was constitutional. In 1910 your Supreme 
Court held the same in the second Ritchie case. 3 
The difference in decision in the two Ritchie cases 
was not due to the difference between a ten-hour 
day and an eight-hour day, for the Supreme Court 
of the United States has since held (as some state 
courts had held earlier) that an eight-hour law 
also was valid; and your Illinois Supreme Court 
has since sustained a nine-hour law. In the two 
Ritchie cases the same broad principles of con¬ 
stitutional law were applied. In each the right 

1 Ritchie v. People, 155 Ill. 98. 

* Muller v. Oregon, 208 U. S. 412. 

* W. C. Ritchie & Co. v. Wagman, 244 Ill. 509. 


352 


BUSINESS —A PROFESSION 


of a legislature to limit (in the exercise of the 
police power) both liberty of contract and use of 
property was fully recognized. But in the first 
Ritchie case the court, reasoning from abstract 
conception, held a limitation of working hours to 
be arbitrary and unreasonable; while in the 
second Ritchie case, reasoning from life, it held 
the limitation of hours not to be arbitrary and 
unreasonable. In other words, — in the second 
Ritchie case it took notice of those facts of general 
knowledge embraced in the world’s experience 
with unrestricted working hours, which the court 
had in the earlier case ignored. It considered the 
evils which had flowed from unrestricted hours, 
and the social and industrial benefit which had 
attended curtailed working hours. It considered 
likewise the common belief in the advisability of 
so limiting working hours which the legislatures 
of many states and countries evidenced. In the 
light of this evidence as to the world’s experience 
and beliefs, it proved impossible for reasonable 
judges to say that the legislature of Illinois had 
acted unreasonably and arbitrarily in limiting the 
hours of labor. 

The Two Night-Work Cases. Decisions ren¬ 
dered by the Court of Appeals of New York show 
even more clearly than do those of Illinois the 
judicial awakening to the facts of life. 


THE LIVING LAW 


353 


In 1907, in the Williams case, 1 that court held 
that an act prohibiting night work for women was 
unconstitutional. In 1915, in the Schweinler 
case 2 it held that a similar night-work act was 
constitutional. And with great clearness and 
frankness the court set forth the reason: 

“While theoretically we might [then] have been able 
to take judicial notice of some of the facts and of some of 
the legislation now called to our attention as sustaining 
the belief and opinion that night work in factories is 
widely and substantially injurious to the health of women, 
actually very few of these facts were called to our atten¬ 
tion, and the argument to uphold the law on that ground 
was brief and inconsequential. 

“Especially and necessarily was there lacking evidence 
of the extent to which, during the intervening years, the 
opinion and belief have spread and strengthened that 
such night work is injurious to women; of the laws as in¬ 
dicating such belief, since adopted by several of our own 
states and by large European countries, and the report 
made to the legislature by its own agency, the factory 
investigating commission, based on investigation of actual 
conditions and the study of scientific and medical opinion 
that night work by women in factories is generally in¬ 
jurious, and ought to be prohibited. . . . 

“So, as it seems to me, in view of the incomplete 
manner in which the important question underlying this 
statute — the danger to women of night work in factories 
— was presented to us in the Williams case, we ought not 
to regard its decision as any bar to a consideration of the 
present statute in the light of all the facts and arguments 

1 People v. Williams, 189 N. Y. 131. 

8 People v. Charles Schweinler Press, 214 N. Y. 395. 


354 


BUSINESS —A PROFESSION 


now presented to us and many of which are in addition to 
those formerly presented, not only as a matter of mere 
presentation, but because they have been developed by 
study and investigation during the years which have in¬ 
tervened since the Williams decision was made. There is 
no reason why we should be reluctant to give effect to 
new and additional knowledge upon such a subject as 
this, even if it did lead us to take a different view of such 
a vastly important question as that of public health or 
disease than formerly prevailed. Particularly do I feel 
that we should give serious consideration and great weight 
to the fact that the present legislation is based upon 
and sustained by an investigation by the legislature de¬ 
liberately and carefully made through an agency of its 
own creation, the present factory investigating com- 
mission. ,, 

Eight years elapsed between the two decisions. 
But the change in the attitude of the court had 
actually come after the agitation of 1912. As 
late as 1911, when the court in the Ives case 1 held 
the first accident compensation law void, it re¬ 
fused to consider the facts of life, saying: 

“The report [of the commission appointed by the 
legislature to consider that subject before legislating] is 
based upon a most voluminous array of statistical tables, 
extracts from the works of philosophical writers and the 
industrial laws of many countries, all of which are de¬ 
signed to show that our own system of dealing with in¬ 
dustrial accidents is economically, morally, and legally 
unsound. Under our form of government, however, 
courts must regard all economic, philosophical, and moral 
theories, attractive and desirable though they may be, as 

1 Ives v. South Buffalo Ry. Co., 201 N. Y. 271. 


THE LIVING LAW 


3 55 


subordinate to the primary question whether they can 
be moulded into statutes without infringing upon the 
letter or spirit of our written constitutions. In that re¬ 
spect we are unlike any of the countries whose industrial 
laws are referred to as models for our guidance. Prac¬ 
tically all of these countries are so-called constitutional 
monarchies in which, as in England, there is no written 
constitution, and the Parliament or law-making body is 
supreme. In our country the federal and state con¬ 
stitutions are the charters which demark the extent and 
the limitations of legislative power; and while it is true 
that the rigidity of a written constitution may at times 
prove to be a hindrance to the march of progress, yet 
more often its stability protects the people against the 
frequent and violent fluctuations of that which, for want 
of a better name, we call ‘public opinion.’” 

On the other hand in July, 1915, in the Jensen 
case, 1 the court, holding valid the second com¬ 
pensation law (which was enacted after a con¬ 
stitutional amendment), said: 

“We should consider practical experiences, as well as 
theory, in deciding whether a given plan in fact consti¬ 
tutes a taking of property in violation of the constitution. 
A compulsory scheme of insurance to secure injured work¬ 
men in hazardous employments and their dependents 
from becoming objects of charity certainly promotes the 
public welfare as directly as does an insurance of bank 
depositors from loss.” 

The Struggle Continues . The court reawakened 
to the truth of the old maxim of the civilians, Ex 
facto jus oritur . It realized that no law, written 

1 Jensen v. Southern Pacific Co., (N. Y.), 109 N. E. R. 600. 


356 


BUSINESS —A PROFESSION 


or unwritten, can be understood without a full 
knowledge of the facts out of which it arises and 
to which it is to be applied. But the struggle for 
the living law has not been fully won. The 
Lochner case has not been expressly overruled. 
Within six weeks the Supreme Judicial Court of 
Massachusetts, in supposed obedience to its au¬ 
thority, held invalid a nine-hour law for certain 
railroad employees . 1 The Supreme Court of the 
United States, which by many decisions had 
made possible in other fields the harmonizing of 
legal rights with contemporary conceptions of 
social justice, showed by its recent decision in the 
Coppage case 2 the potency of mental preposses¬ 
sions. Long before it had recognized 3 that em¬ 
ployers “and their operatives do not stand upon 
an equalitythat “the legislature being familiar 
with local conditions is primarily the judge of the 
necessity of such enactments 4 and that unless 
a “prohibition is palpably unreasonable and arbi¬ 
trary we are not at liberty to say that it passes 
beyond the limitation of a state’s protective au¬ 
thority.” 5 And in the application of these prin¬ 
ciples it had repeatedly upheld legislation limiting 
the right of free contract between employer and 

1 Commonwealth v. B. & M. R. R. (Mass.), no N. E. R. 264. 

2 Coppage v. Kansas, 236 U. S. 1. 

* See 219 U. S. 570. 

4 See 219 U. S. 569. 

6 See 238 U. S. 452. 


THE LIVING LAW 


357 


employee. But in the Adair case , 1 and again in 
the Coppage case , 2 it declared unconstitutional a 
statute which prohibited an employer from re¬ 
quiring as a condition of his securing or retaining 
employment that the workman should not be a 
member of a labor union. Without considering 
that Congress or the Kansas legislature might 
have had good cause to believe that such prohibi¬ 
tion was essential to the maintenance of trade- 
unionism, and that trade-unionism was essential 
to securing equality between employer and em¬ 
ployee, our Supreme Court of the United States 
declared that the enactment of the anti-dis¬ 
crimination law was an arbitrary and unreason¬ 
able interference with the right of contract. 

The Business Men's Protest. The challenge of 
existing law does not, however, come only from 
the working classes. Criticism of the law is 
widespread among business men. The tone of 
their criticism is more courteous than that of the 
working classes, and the specific objections raised 
by business men are different. Business men do 
not demand recall of judges or of judicial decisions. 
Business men do not ordinarily seek constitutional 
amendments. They are more apt to desire repeal 
of statutes than enactment. But both business 
men and working men insist that courts lack un- 

1 Adair v. United States, 208 U. S. 161. 1 Supra. 


358 


BUSINESS— A PROFESSION 


derstanding of contemporary industrial conditions. 
Both insist that the law is not “up to date.” Both 
insist that the lack of familiarity with the facts 
of business life results in erroneous decisions. In 
proof of this, business men point to certain de¬ 
cisions under the Sherman Law, and certain 
applications of the doctrine of contracts against 
public policy — decisions like the Dr. Miles 
Medical Co. case , 1 in which it is held that manu¬ 
facturers of a competitive trade-marked article 
cannot legally contract with retailers to maintain 
a standard selling price for their article, and thus 
prevent ruinous price cutting. Both business 
men and working men have given further evi¬ 
dence of their distrust of the courts and of lawyers 
by their efforts to establish non-legal tribunals or 
commissions to exercise functions which are 
judicial (even where not legal) in their nature, 
and by their insistence that the commissions shall 
be manned with business and working men in¬ 
stead of lawyers. And business men have been 
active in devising other means of escape from the 
domain of the courts, as is evidenced by the wide¬ 
spread tendency to arbitrate controversies through 
committees of business organizations. 

An Inadequate Remedy. The remedy so sought 
is not adequate, and may prove a mischievous 
1 Dr. Miles Medical Co. v, Park & Sons Co., 220 U. S. 409* 


THE LIVING LAW 


359 


one. What we need is not to displace the courts, 
but to make them efficient instruments of jus¬ 
tice; not to displace the lawyer, but to fit him for 
his official or judicial task. And indeed the task 
of fitting the lawyer and the judge to perform 
adequately the functions of harmonizing law with 
life is a task far easier of accomplishment than 
that of endowing men, who lack legal training, 
with the necessary qualifications. 

The training of the practicing lawyer is that 
best adapted to develop men not only for the 
exercise of strictly judicial functions, but also for 
the exercise of administrative functions quasi¬ 
judicial in character. It breeds a certain virile, 
compelling quality, which tends to make the 
possessor proof against the influence of either fear 
or favor. It is this quality to which the prevail¬ 
ing high standard of honesty among our judges is 
due. And it is certainly a noteworthy fact that 
in spite of the abundant criticism of our judicial 
system, the suggestion of dishonesty is rare; and 
instances of established dishonesty are extremely 
few. 

The All-Round Lawyer . The pursuit of the 
legal profession involves a happy combination of 
the intellectual with the practical life. The intel¬ 
lectual tends to breadth of view; the practical to 
that realization of limitations which are essential 


360 


BUSINESS — A PROFESSION 


to the wise conduct of life. Formerly the lawyer 
secured breadth of view largely through wide 
professional experience. Being a general practi¬ 
tioner, he was brought into contact with all 
phases of contemporary life. His education was 
not legal only, because his diversified clientage 
brought him, by the mere practice of his profes¬ 
sion, an economic and social education. The 
relative smallness of the communities tended to 
make his practice diversified not only in the char¬ 
acter of matters dealt with, but also in the char¬ 
acter or standing of his clients. For the same 
lawyer was apt to serve at one time or another 
both rich and poor, both employer and employee. 
Furthermore — nearly every lawyer of ability 
took some part in political life. Our greatest 
judges, Marshall, Kent, Story, Shaw, had secured 
this training. Oliver, in his study of Alexander 
Hamilton, pictured the value of such training in 
public affairs: 

“In the vigor of his youth and at the very summit of 
hope, he brought to the study of the law a character 
already trained and tested by the realities of life, formed 
by success, experienced in the facts and disorders with 
which the law has to deal. Before he began a study of 
the remedies he had a wide knowledge of the conditions 
of human society. . . . With him . . . the law was . . . 
a reality, quick, human, buxom and jolly, and not a 
formula, pinched, stiff, banded and dusty like a royal 
mummy of Egypt.” 


THE LIVING LAW 


361 


Hamilton was an apostle of the living law. 

The Specialist . The last fifty years have 
wrought a great change in professional life. In¬ 
dustrial development and the consequent growth 
of cities have led to a high degree of specializa¬ 
tion — specialization not only in the nature and 
class of questions dealt with, but also specializa¬ 
tion in the character of clientage. The term 
“corporation lawyer” is significant in this con¬ 
nection. The growing intensity of professional 
life tended also to discourage participation in 
public affairs, and thus the broadening of view 
which comes from political life was lost. The 
deepening of knowledge in certain subjects was 
purchased at the cost of vast areas of ignorance 
and grave danger of resultant distortion of 
judgment. 

The effect of this contraction of the lawyers’ 
intimate relation to contemporary life was doubly 
serious, because it came at a time when the 
rapidity of our economic and social transforma¬ 
tion made accurate and broad knowledge of 
present-day problems essential to the administra¬ 
tion of justice. 

The judge came to the bench unequipped with 
the necessary knowledge of economic and social 
science, and his judgment suffered likewise through 
lack of equipment in the lawyers who presented 


362 


BUSINESS — A PROFESSION 


the cases to him. For a judge rarely performs his 
functions adequately unless the case before him 
is adequately presented. Thus were the blind led 
by the blind. It is not surprising that under such 
conditions the laws as administered failed to meet 
contemporary economic and social demands. 

The True Remedy. We are powerless to re¬ 
store the general practitioner and general par¬ 
ticipation in public life. Intense specialization 
must continue. But we can correct its distorting 
effects by broader education — by study under¬ 
taken preparatory to practice — and continued 
by lawyer and judge throughout life: study of 
economics and sociology and politics which em¬ 
body the facts and present the problems of today. 

“Every beneficent change in legislation,” Professor 
Henderson said, “comes from a fresh study of social 
conditions, and social ends, and from such rejection of 
obsolete laws to make room for a rule which fits the new 
facts. One can hardly escape from the conclusion that a 
lawyer who has not studied economics and sociology is 
very apt to become a public enemy.” 

Your former townsman, Charles R. Crane, told 
me once the story of two men whose lives he would 
have cared most to have lived. Once was Bogigish, 
a native of the ancient city of Ragusa off the coast 
of Dalmatia, — a deep student of law, who after 
gaining some distinction at the University of 
Vienna and in France, became Professor at the 


THE LIVING LAW 


363 


University of Odessa. When Montenegro was 
admitted to the family of nations, its Prince con¬ 
cluded that, like other civilized countries, it must 
have a code of law. Bogigish’s fame had reached 
Montenegro, — for Ragusa is but a few miles 
distant. So the Prince begged the Czar of Russia 
to have the learned jurist prepare a code for 
Montenegro. The Czar granted the request, and 
Bogigish undertook the task. But instead of 
utilizing his great knowledge of laws to draft a 
code, he proceeded to Montenegro, and for two 
years literally made his home with the people, — 
studying everywhere their customs, their prac¬ 
tices, their needs, their beliefs, their points of 
view. Then he embodied in law the life which 
the Montenegrins lived. They respected that 
law, because it expressed the will of the people. 


TRUE AMERICANISM 


Fourth of July Oration, 1915 

Ladies and Gentlemen: — 

E pluribus unum — Out of many one —was 
the motto adopted by the founders of the Re¬ 
public when they formed a union of the thirteen 
states. To these we have added, from time to 
time, thirty-five more. The founders were con¬ 
vinced, as we are, that a strong nation could be 
built through federation. They were also con¬ 
vinced, as we are, that in America, under a free 
government, many peoples would make one 
nation. Throughout all these years we have ad¬ 
mitted to our country and to citizenship immi¬ 
grants from the diverse lands of Europe. We 
had faith that thereby we would best serve our¬ 
selves and mankind. This faith has been justi¬ 
fied. The United States has grown great. The 
immigrants and their immediate descendants have 
proved themselves as loyal as any citizens of the 
country. Liberty has knit us closely together as 
Americans. f Note the common devotion to our 
country’s emblem expressed at the recent Flag 


TRUE AMERICANISM 


365 


Day celebration in New York by boys and girls 
representing more than twenty different nation¬ 
alities warring abroad. 

On the nation’s birthday it is customary for us 
to gather together for the purpose of considering 
how we may better serve our country. This year 
we are asked to address ourselves to the newcomers 
and to make this Fourth of July what has been 
termed Americanization Day. 

AMERICANIZATION 

What is Americanization? It manifests itself, 
in a superficial way, when the immigrant adopts 
the clothes, the manners and the customs gen¬ 
erally prevailing here. Far more important is the 
manifestation presented when he substitutes for 
his mother tongue the English language as the 
common medium of speech. But the adoption of 
our language, manners and customs is only a 
small part of the process. To become American¬ 
ized the change wrought must be fundamental. 
However great his outward conformity, the im¬ 
migrant is not Americanized unless his interests 
and affections have become deeply rooted here. 
And we properly demand of the immigrant even 
more than this, —he must be brought into com¬ 
plete harmony with our ideals and aspirations 
and cooperate with us for their attainment. Only 


366 


BUSINESS —A PROFESSION 


when this has been done will he possess the 
national consciousness of an American. 

I say “he must be brought into complete har¬ 
mony.” But let us not forget that many a poor 
immigrant comes to us from distant lands, igno¬ 
rant of our language, strange in tattered clothes 
and with jarring manners, who is already truly 
American in this most important sense; who has 
long shared our ideals and who, oppressed and 
persecuted abroad, has yearned for our land of 
liberty and for the opportunity of aiding in the 
realization of its aims. 

AMERICAN IDEALS 

What are the American ideals? They are the 
development of the individual for his own and the 
common good; the development of the individual 
through liberty, and the attainment of the com¬ 
mon good through democracy and social justice. 

Our form of government, as well as humanity, 
compels us to strive for the development of the 
individual man. Under universal suffrage (soon 
to be extended to women) every voter is a part 
ruler of the state. Unless the rulers have, in the 
main, education and character, and are free men, 
our great experiment in democracy must fail. It 
devolves upon the state, therefore, to fit its rulers 
for their task. It must provide not only facilities 


TRUE AMERICANISM 


367 


for development but the opportunity of using 
them. It must not only provide opportunity, it 
must stimulate the desire to avail of it. Thus we 
are compelled to insist upon the observance of 
what we somewhat vaguely term the American 
standard of living; we become necessarily our 
brothers’ keepers. 

THE AMERICAN STANDARD OF LIVING 

What does this standard imply? In substance, 
the exercise of those rights which our Constitu¬ 
tion guarantees — the right to life, liberty and the 
pursuit of happiness. Life, in this connection, 
means living, not existing; liberty, freedom in 
things industrial as well as political; happiness 
includes, among other things, that satisfaction 
which can come only through the full develop¬ 
ment and utilization of one’s faculties. In order 
that men may live and not merely exist, in order 
that men may develop their faculties, they must 
have a reasonable income; they must have health 
and leisure. High wages will not meet the worker’s 
need unless employment be regular. The best of 
wages will not compensate for excessively long 
working hours which undermine health. And 
working conditions may be so bad as to nullify 
the good effects of high wages and short hours. 
The essentials of American citizenship are not 


368 


BUSINESS —A PROFESSION 


satisfied by supplying merely the material needs 
or even the wants of the worker. 

Every citizen must have education — broad 
and continuous. This essential of citizenship is 
not met by an education which ends at the age 
of fourteen, or even at eighteen or twenty-two. 
Education must continue throughout life. A 
country cannot be governed well by rulers whose 
education and mental development are gained 
only from their attendance at the common school. 
Whether the education of the citizen in later 
years is to be given in classes or from the public 
platform, or is to be supplied through discussion 
in the lodges and the trade unions, or is to be 
gained from the reading of papers, periodicals and 
books, in any case, freshness of mind is indispen¬ 
sable to its attainment. And to the preservation 
of freshness of mind a short workday is as essen¬ 
tial as adequate food and proper conditions of 
working and of living. The worker must, in other 
words, have leisure. But leisure does not imply 
idleness. It means ability to work not less but 
more, ability to work at something besides bread¬ 
winning, ability to work harder while working at 
breadwinning, and ability to work more years at 
breadwinning. Leisure, so defined, is an essen¬ 
tial of successful democracy. 

Furthermore, the citizen in a successful democ- 


TRUE AMERICANISM 


369 


racy must not only have education, he must be 
free. Men are not free if dependent industrially 
upon the arbitrary will of another. Industrial 
liberty on the part of the worker cannot, there¬ 
fore, exist if there be overweening industrial 
power. Some curb must be placed upon capi¬ 
talistic combination. Nor will even this curb be 
effective unless the workers cooperate, as in trade 
unions. Control and cooperation are both essen¬ 
tial to industrial liberty. 

And if the American is to be fitted for his task 
as ruler, he must have besides education and in¬ 
dustrial liberty also some degree of financial in¬ 
dependence. Our existing industrial system is 
converting an ever increasing percentage of the 
population into wage-earners; and experience 
teaches us that a large part of these become at 
some time financial dependents, by reason of 
sickness, accident, invalidity, superannuation, 
unemployment or premature death of the bread¬ 
winner of the family. Contingencies like these, 
which are generally referred to in the individual 
case as misfortunes, are now recognized as ordi¬ 
nary incidents in the life of the wage-earner. 
The need of providing indemnity against finan¬ 
cial losses from such ordinary contingencies in 
the workingman’s life has become apparent and 
is already being supplied in other countries. The 


870 


BUSINESS —A PROFESSION 


standard worthy to be called American implies 
some system of social insurance. 

And since the child is the father of the man, we 
must bear constantly in mind that the American 
standard of living cannot be attained or preserved 
unless the child is not only well fed but well born; 
unless he lives under conditions wholesome morally 
as well as physically; unless he is given education 
adequate both in quantity and in character to fit 
him for life’s work. 

THE DISTINCTLY AMERICAN 

Such are our ideals and the standard of living 
we have erected for ourselves. But what is there 
in these ideals which is peculiarly American? 
Many nations seek to develop the individual man 
for himself and for the common good. Some are 
as liberty-loving as we. Some pride themselves 
upon institutions more democratic than our own. 
Still others, less conspicuous for liberty or democ¬ 
racy, claim to be more successful in attaining 
social justice. And we are not the only nation 
which combines love of liberty with the practice 
of democracy and a longing for social justice. 
But there is one feature in our ideals and practices 
which is peculiarly American, — it is inclusive 
brotherhood. 

Other countries, while developing the individual 


TRUE AMERICANISM 


371 


man, have assumed that their common good would 
be attained only if the privileges of their citizen¬ 
ship should be limited practically to natives or 
to persons of a particular nationality. America, 
on the other hand, has always declared herself 
for equality of nationalities as well as for equality 
of individuals. It recognizes racial equality as an 
essential of full human liberty and true brother¬ 
hood, and that racial equality is the complement 
of democracy. America has, therefore, given like 
welcome to all the peoples of Europe. 

Democracy rests upon two pillars: one, the 
principle that all men are equally entitled to life, 
liberty and the pursuit of happiness; and the 
other, the conviction that such equal opportunity 
will most advance civilization. Aristocracy, on 
the other hand, denies both these postulates. It 
rests upon the principle of the superman. It 
willingly subordinates the many to the few, and 
seeks to justify sacrificing the individual by in¬ 
sisting that civilization will be advanced by such 
sacrifices. 

The struggles of the eighteenth and nineteenth 
centuries both in peace and in war were devoted 
largely to overcoming the aristocratic position as 
applied to individuals. In establishing the equal 
right of every person to development it became 
clear that equal opportunity for all involves this 


372 


BUSINESS —A PROFESSION 


necessary limitation: each man may develop him¬ 
self so far, but only so far, as his doing so will not 
interfere with the exercise of a like right by all 
others. Thus liberty came to mean the right to 
enjoy life, to acquire property, to pursue happiness 
in such manner and to such extent only as the 
exercise of the right in each is consistent with the 
exercise of a like right by every other of our fellow 
citizens. Liberty thus defined underlies twentieth- 
century democracy. Liberty thus defined exists 
in a large part of the western world. And even 
where this equal right of each individual has not 
yet been accepted as a political right, its ethical 
claim is gaining recognition. 

America, dedicated to liberty and the brother¬ 
hood of man, rejected the aristocratic principle 
of the superman as applied to peoples as it re¬ 
jected the principle when applied to individuals. 
America has believed that each race had some¬ 
thing of peculiar value which it can contribute to 
the attainment of those high ideals for which it 
is striving. America has believed that we must 
not only give to the immigrant the best that we 
have, but must preserve for America the good 
that is in the immigrant and develop in him the 
best of which he is capable. America has be¬ 
lieved that in differentiation, not in uniformity, 
lies the path of progress. It acted on this belief; 


TRUE AMERICANISM 873 

it has advanced human happiness, and it has 
prospered. 


WAR AND PEACE 

On the other hand, the aristocratic theory as 
applied to peoples survived generally throughout 
Europe. It was there assumed by the stronger 
countries that the full development of one people 
necessarily involved its domination over another, 
and that only by such domination would civiliza¬ 
tion advance. Strong nationalities, assuming their 
own superiority, came to believe that they pos¬ 
sessed the divine right to subject other peoples to 
their sway; and the belief in the existence of such 
a right ripened into a conviction that there was 
also a duty to exercise it. The Russianizing of 
Finland, the Prussianizing of Poland and Alsace, 
the Magyarizing of Croatia, the persecution of 
the Jews in Russia and Rumania, are the fruits of 
this arrogant claim of superiority; and that claim 
is also the underlying cause of the present war. 

The movements of the last century have proved 
that whole peoples have individuality no less 
marked than that of the single person; that the 
individuality of a people is irrepressible, and that 
the misnamed internationalism which seeks the 
obliteration of nationalities or peoples is unat¬ 
tainable. The new nationalism adopted by 


374 


BUSINESS—A PROFESSION 


America proclaims that each race or people, like 
each individual, has the right and duty to de¬ 
velop, and that only through such differentiated 
development will high civilization be attained. 
Not until these principles of nationalism, like 
those of democracy, are generally accepted will 
liberty be fully attained and minorities be secure 
in their rights. Not until then can the founda¬ 
tion be laid for a lasting peace among the nations. 

The world longs for an end of this war, and 
even more for a peace that will endure. It turns 
anxiously to the United States, the one great 
neutral country, and bids us point the way. And 
may we not answer: Go the way of liberty and 
justice — led by democracy and the new nation¬ 
alism. Without these, international congresses 
and supreme courts will prove vain and disarma¬ 
ment “The Great Illusion.” 

And let us remember the poor parson of whom 
Chaucer says: 

“But Criste’s loore, and his Apostles twelve, 

He taughte, but first he followed it hymselve.” 



























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